ECO 302 Week 5 Quiz 4 Chapter 6 and 7 – Strayer

ECO 302 Week 5 Quiz – Strayer (All Possible Questions With Answers)

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Chapter 6

TRUE/FALSE

1. Bond holdings and interest income are zero for the whole economy.

2. The household real budget constraint shows that household real consumption is equal to household real income plus household real saving.

3. In the Barro model prices like the real wage adjust to clear markets like the labor market.

4. In the Barro model the nominal rate of return on capital, (R/P) – is greater than the nominal return on bonds, i, because capital is viewed by households as more risky than bonds.

5. Real profit equals real output plus spending on capital and labor inputs.

6. In the bond market, a higher interest rate means that borrowing is less expensive than before.

7. Household decisions depend on the nominal values for wages and rent rather than the real values for wages and rent.

8. In the Barro model, households use money as a means for trading goods and services.

9. In the Barro market model, gold serves as money.

10. The market-clearing interest rate depends on the marginal productivity of capital.

MULTIPLE CHOICE

1. The market clearing approach assumes that:
a. people are not able to affect prices that influence their decisions. c. firms are not able to affect prices that influence their decisions.
b. prices adjust to clear markets. d. all of the above.

2. The market clearing approach assumes that:
a. people are not able to affect prices that influence their decisions. c. firms are able to affect prices that influence their decisions.
b. prices change very slowly. d. all of the above.

3. The market clearing approach assumes that:
a. people are able to affect prices that influence their decisions. c. firms are able to affect prices that influence their decisions.
b. prices adjust to clear markets. d. all of the above.

4. The market clearing approach assumes that:
a. people are able to affect prices that influence their decisions. c. firms are not able to affect prices that influence their decisions.
b. prices change very slowly. d. all of the above.

5. The labor market clears when:
a. the real wage causes LS = LD. c. the marginal product of labor is zero.
b. the real wage causes LS to be minimized. d. the real wage causes LS to be as large as possible.

6. In the goods market in the Barro model households can buy:
a. bonds. c. labor services.
b. goods to increase their stock of capital. d. all of the above.

7. The goods market the price, P, is:
a. the price level. c. the price of a particular good.
b. the rental price of goods. d. the interest rate.

8. In the rental market in the Barro model, households buy and sell:
a. real estate. c. the use of capital for one period.
b. consumer durables like cars. d. all of the above.

9. A bond that is traded in the bond market in the Barro model is piece of paper that:
a. is the lenders claim to the amount owed by the borrower. c. is the lenders claim to ownership in the company.
b. is the borrowers claim to the amount owed by the lender. d. assures the person is who they say they are.

10. Money in the Barro model is held because:
a. for its own sake. c. to earn interest.
b. to trade fairly soon for something else. d. all of the above.

11. Money in the Barro model is:
a. gold. c. interest earning.
b. a medium of exchange. d. all of the above.

12. One unit of money in the Barro model has a purchasing power of:
a. the price level time that one unit, P. c. the interest rate, i.
b. the price level over the interest rate, (P/i). d. one over the price level, (1/P)

13. If a household has $2,000 in money and the price level is 10, then the real value of its money is:
a. $10. c. 200 goods.
b. $20,000. d. 1,900 goods.

14. The real wage is:
a. hourly earning after taxes. c. the value of a worker’s time in goods received.
b. wages plus fringe benefits. d. the price level divided by the nominal wage rate.

15. If the nominal wage rate is $10 per hour and the price level is 2, then the real wage a worker earns is:
a. five units of goods per hour. c. twenty units of goods per hour.
b. eight units of goods per hour. d. one-fifth unit of goods per hour.

16. If the rental price of a capital good is $100 and the price level is 25, then when renting the capital the owner’s real earnings are:
a. 4 units of output per period. c. seventy five units of output per period.
b. 2,500 units of output per period. d. one-forth unit of output per period.

17. The rental price of capital is:
a. a dollar amount per unit of capital. c. a nominal interest rate
b. a real interest rate. d. profit.

18. Over all households bonds, B, must total zero because:
a. there are no bonds in the model. c. bonds are not important in the model.
b. for every dollar loaned a dollar is borrowed in the bond market. d. bonds are illegal in most economies.

19. The profit in the model is:
a. output – (wages times labor hired + the rental price times capital rented). c. (price times output) – (wages times labor hired + the rental price times capital rented).
b. (price times output) divided by (wages times labor hired + the rental price times capital rented). d. (wages times labor hired + the rental price times capital rented) – (price times output).

20. The rate of return from owning capital is:
a. the rental price of capital, R. c. the net nominal rental income, (R/P)•PK – PK.
b. the value of depreciation, PK. d. the real rental price less depreciation, (R/P) – .

21. The principal of a bond is:
a. the amount of interest paid each period. c. the amount of interest paid over the term of the bond.
b. the initial amount borrowed. d. the total amount to be paid back including the amount borrow and the amount of interest paid over the term of the bond.

22. The maturity of a bond is:
a. the amount of interest paid each period. c. the amount of interest paid over the term of the bond.
b. the amount borrowed. d. the time at which the lender must be paid back.

23. If the principal of a bond is $100, it matures in a year and the interest rate is 4%, then at the interest payment on this bond will be:
a. $100. c. $4.
b. $96. d. $400.

24. If the principal of a bond is $1000, it matures in a year and the interest rate is 6%, then at the end of the year the lender will receive:
a. $1000. c. $60.
b. $1060. d. $940.

25. In the market clearing model, for the whole economy interest income is:
a. bonds minus the interest rate. c. the interest rate divided by bonds.
b. zero. d. bonds divided by the interest rate.

26. Individual household nominal income includes:
a. nominal interest income, iB. c. nominal wage income, wL.
b. nominal net rental income, [(R/P) – PK]•PK. d. all of the above.

27. In the model the nominal interest rate equals the nominal net return on capital, i = (R/P) – , because:
a. other than rates of return bonds and capital look the same to households as assets. c. bonds are riskier than capital.
b. capital is riskier than bonds. d. bonds are zero in the aggregate.

28. In the model the nominal interest rate equals the nominal net return on capital, i = (R/P) – , because:
a. bonds are zero in the aggregate. c. bonds are riskier than capital.
b. capital is riskier than bonds. d. if bonds offered a higher return than capital households would hold no capital.

29. According to the household nominal budget constraint, PC+ B+P• K = + wL + i(B + PK), households can use their income to:
a. purchase consumption goods. c. purchase capital goods.
b. acquire more bonds. d. all of the above.

30. Interest income is:
a. positive for net bond holders. c. negative for net bond issuers.
b. zero for the whole economy. d. all of the above.

31. According to the household nominal budget constraint, PC+ B+P• K = + wL + i(B + PK), households can use their income to:
a. purchase consumption goods. c. acquire more money.
b. hire more workers. d. all of the above.

32. According to the household nominal budget constraint, PC+ B+P• K = + wL + i(B + PK), households can use their income to:
a. acquire more money. c. pay more wages.
b. acquire more bonds. d. all of the above.

33. According to the household nominal budget constraint, PC+ B+P• K = + wL + i(B + PK), households can use their income to:
a. hire more workers. c. purchase capital goods.
b. acquire more money. d. all of the above.

34. If a household this week produces 20 of its product at a cost of 50 cents each, sells them for $1, works 40 hours at $10 per hour, must pay $10 in interest owed on its borrowing and rents out 10 units of capital at $100 for the week, the household’s, nominal income is:
a. $1,440 this week. c. $1,420 this week.
b. $1,400 this week. d. none of the above.

35. The household real budget constraint C + ( B/P) + K = ( /P)+ (w/P)•L + i•((B/P) + K).
shows that in our model:
a. households get income only from labor. c. households can spend their income only on consumption.
b. households can spend their income on consumption or acquiring more capital and bonds. d. households view bonds as riskier than capital.

36. The household’s budget constraint shows that:
a. sources of fund = uses of funds. c. labor income is the largest part of income.
b. profits are the largest part of income d. consumption is the largest part of spending.

37. The household real budget constraint C + ( B/P) + K = ( /P) + (w/P)•L + i•((B/P) + K).
shows that in our model:
a. households get income only from labor. c. households get income from profits from production, labor and interest on bonds and capital.
b. households can spend their income only on consumption. d. households view bonds as riskier than capital.

38. To maximize profit a firm should hire labor:
a. until it can produce no more of its product. c. until the marginal product of labor equal the real wage rate.
b. until the marginal product of labor begins to fall. d. until the marginal product of labor is zero.

39. An investment in the Barro model is:
a. the purchase of a bond. c. the purchase of a capital good used for production.
b. the purchase of ownership in a firm. d. all of the above.

40. To maximize profit a firm should hire capital:
a. until it can produce no more of its product. c. until the marginal product of capital equal the real rental price of capital.
b. until the marginal product of labor begins to fall. d. until the marginal product of capital is zero.

41. In the market for capital services:
a. the supply of capital adjusts to create market clearing. c. the demand for capital adjusts to create market clearing.
b. the real rental price of capital adjusts to create market clearing. d. all of the above.

42. In the market clearing model, depreciation, , is:
a. the rate at which capital disappears. c. the rate at which bonds lose value.
b. the rate at which money loses value. d. all of the above.

43. In the market clearing model:
a. households can owe pay interest. c. for the whole economy interest income is zero.
b. households can earn interest. d. all of the above.

44. In the market clearing model, nominal saving is:
a. the change in money + the change in bonds + the change in the nominal value of capital. c. + wL + i(B + PK) – PC.
b. nominal income less nominal consumption. d. all of the above.

45. In the market clearing model, nominal saving is:
a. the change in money + the change in bonds. c. + wL + i(B + PK) – PC.
b. nominal income plus nominal consumption. d. all of the above.

46. In the market clearing model, nominal saving is:
a. always zero. c. nominal income – depreciation of capital.
b. nominal income less nominal consumption. d. all of the above.

47. In the market clearing model, nominal saving is:
a. the change in money + the change in bonds + the change in the nominal value of capital. c. always zero.
b. nominal income plus nominal saving. d. all of the above.

48. Real saving is:
a. + wL + i(B + PK) – PC. c. ( /P) + (w/P)L + i((B/P) + K) – C.
b. output plus consumption. d. all of the above.

49. Figure 6.1

In Figure 6.1 an increase in real income is shown by:
a. a shift of the curve up and to the right. c. a shift of the curve inward and to the left.
b. rotating the curve out the real consumption axis. d. rotating the curve up the real saving axis.

50. In the market clearing model, the demand for capital and labor come from:
a. the tastes of people. c. the objective of profit maximizing.
b. rental and labor markets. d. all of the above.

51. In the goods market, production of goods comes from
a. large corporate firms. c. households.
b. technology-related businesses. d. large partnerships.

52. Households buy goods on the goods market because they wish to
a. consume. c. export.
b. invest. d. both (a) and (b).

53. Households provide to the rental market
a. all available capital services, so that no capital remains idle. c. none of their capital services, since households do not own capital.
b. some of their capital services, leaving a fraction of capital idle. d. none of their capital services, so that only businesses own capital.

54. In the Barro market model, currency is used
a. to earn interest income. c. only in the bond market.
b. as a medium of exchange. d. only in the labor market.

55. Households earn interest from
a. holding bonds and holding money. c. holding bonds, but not from holding money.
b. holding money, but not from holding bonds. d. none of the above.

56. To simplify the analysis of the bond market, the Barro bond market model initially assumes that
a. each bond has a different risk level. c. bond maturities are long.
b. a bond has no principal amount. d. the inflation rate is zero.

57. A household views the real rental price for capital (R/P) as
a. the rate of return on capital only after it is adjusted for depreciation. c. the profit from its production of goods and services.
b. the rate of return on capital only after it is adjusted for inflation. d. the profit from its holdings of bonds and money.

58. In the Barro markets model, the medium(s) of exchange
a. is bonds. c. are both bonds and money.
b. is money. d. are bonds, money, and labor services.

59. If bonds offer a higher rate of return than capital does, then households would
a. hold neither bonds nor capital. c. hold bonds only.
b. hold capital only. d. hold both bonds and capital.

60. In the market for capital services, if the real rental price is below the market-clearing rental price, then
a. suppliers of capital services would compete by bidding down the real rental price. c. the market for capital services would be in equilibrium.
b. suppliers of capital services would compete by bidding up the real rental price. d. demanders of capital services would compete by bidding up the real rental price.

SHORT ANSWER

1. How is profit calculated in the model?

2. What is the household real budget constraint and what does it tell us?

3. In the model why does the return on bonds, i, equal the return on capital, (R/P) – ?

4. What is real profit in the Barro model?

5. What causes the labor and capital markets to clear in the Barro model?

6. In the Barro market-clearing model, on what variable does the interest rate depend? Explain briefly.

7. Why does the Barro model assume that the labor and capital market clear? Explain briefly.

8. In the Barro market model, why are equilibrium profits equal to zero?

Chapter 7

TRUE/FALSE

1. If the value of initial assets increases, then a household will change consumption or present value of asset at the end of period 2 due to an income effect.

2. $100 a year from now is equal in worth to $100 today.

3. A discount factor is used to deflate nominal consumption to real consumption.

4. If wages rises by $10 per worker just this period, we would expect to see consumption rise by much less than $10 this period.

5. The aggregate household budget constraint is consumption plus net investment is real GDP less depreciation.

6. In the multiyear household budget constraint, wage incomes from each year are added together without further adjustments.

7. In the multiyear household budget constraint, initial asset values are excluded.

8. An increase in the interest rate leads to an income effect and an intertemporal-substitution effect on consumption which offset each other.

9. An increase in the interest rate leads to an income effect which increases consumption and saving in year 1.

10. An increase in the interest rate leads to an intertemporal substitution effect which decreases consumption and increases saving in year 1.

MULTIPLE CHOICE

1. Real profit is zero when:
a. the interest rate is zero. c. the labor and capital markets clear.
b. the depreciation rate is high. d. the labor and capital markets do not clear.

2. When the labor and capital markets clear:
a. depreciation is zero. c. a dollar today is worth more than a dollar in the future.
b. real profit is zero. d. all of the above.

3. Real household saving is:
a. B + K c. ( B/P) + K
b. B + ( K/P) d. ( B/P) + ( K/P)

4. Real income is:
a. wL + i(B+K) c. (w/P)L + i((B/P)+(K/P))
b. (w/P)L + i((B/P)+ K) d. (w/P)L + i(B+ K)

Figure 7.1

5. In Figure 7.1 if the household opts to consume all its income it will be at point:
a. F c. H
b. G d. I

6. In Figure 7.1 if the household decides to save all of its income, it would be at point:
a. F c. H
b. G d. I

7. In Figure 7.1 if the household moves from point G to point H on its budget, it would be:
a. saving and consuming more. c. saving more and consuming less.
b. saving less and consuming more. d. saving and consuming less.

8. In Figure 7.1 if the household moves from point I to point H on its budget, it would be:
a. saving and consuming more. c. saving more and consuming less.
b. saving less and consuming more. d. saving and consuming less.

9. In Figure 7.1 if the household moves from point F to point H on its budget, it would be:
a. saving and consuming more. c. saving more and consuming less.
b. saving less and consuming more. d. saving and consuming less.

10. In Figure 7.1 if the household moves from point H to point G on its budget, it would be:
a. saving and consuming more. c. saving more and consuming less.
b. saving less and consuming more. d. saving and consuming less.

11. In Figure 7.1 if the household moves from point H to point G on its budget, it would be:
a. gaining one unit of saving and one unit of consumption. c. gaining one unit of saving for giving up five units of consumption.
b. giving up one unit of saving for one unit of consumption. d. giving up one unit of saving and five units of consumption.

12. Real saving in year one is:
a. real bonds plus capital in year 1 minus real bonds and capital in year 0. c. bonds plus capital in period 1.
b. bonds plus capital plus money period 1. d. interest times the sum of bonds plus capital in period 1.

13. The household’s year one budget constraint is:
a. real assets at the end of year zero plus real income in year one less consumption in year one equals real assets at the end of year one. c. real assets at the end of year zero plus real income in year one plus consumption in year one equals real assets at the end of year one.
b. real income in year one less real assets at the end of year zero less consumption in year one equals real assets at the end of year one. d. real income in year one plus consumption in year one less real assets at the end of year zero equals real assets at the end of year one.

14. In the one period budget constraint sources of funds include:
a. labor income. c. income from bonds.
b. income from capital. d. all of the above.

15. In the one period budget constraint sources of funds include:
a. labor income. c. capital gains.
b. interests bearing money. d. all of the above.

16. In the one period budget constraint sources of funds include:
a. capital gains. c. income from rising prices.
b. income from capital. d. all of the above.

17. In the one period budget constraint sources of funds include:
a. capital gains. c. income from bonds.
b. inflation. d. all of the above.

18. In the one period budget constraint the uses of funds include:
a. purchases of consumption goods. c. purchases of bonds.
b. purchases of capital goods. d. all of the above.

19. In the one period budget constraint the uses of funds include:
a. purchases of consumption goods. c. payment profits.
b. payment of wages. d. all of the above.

20. In the one period budget constraint the uses of funds include:
a. payment of transfers. c. payment of wages.
b. purchases of capital goods. d. all of the above.

21. In the one period budget constraint the uses of funds include:
a. payment of transfers. c. purchases of bonds.
b. payment of wages. d. all of the above.

22. The measure used to reduce future consumption to today’s values is called:
a. an implicit deflator. c. an escalator.
b. a discount factor. d. a future value.

23. When a discount factor is multiplied times a future period variable it creates a:
a. future value. c. a real variable.
b. a present value. d. a nominal variable.

24. A dollar today is worth more than a dollar a year from now as long as:
a. the interest rate is negative. c. the depreciation rate is negative.
b. the interest rate is positive. d. the depreciation rate is positive.

25. An income effect is the response of households to changes in the present value of:
a. relative prices. c. uses of funds.
b. sources of funds. d. assets at the end of year two.

26. If the interest rate is greater than zero, then the concept of present value is that a dollar today:
a. is worth more than a dollar a year from now. c. will be worthless a year from now.
b. is worth less than a dollar a year from now. d. is worth the same as a year from now.

27. If the present value of assets at the end of year two is constant, an increase in the present value of sources of funds must cause:
a. consumption in periods one and two to rise. c. consumption to rise in period one and fall in period two.
b. consumption in periods one and two to fall. d. consumption to fall in period one and rise in period two.

28. The present value of sources of funds is:
a. the value of intial assets plus the present value of wage income plus the present value of assets at the end of year two. c. the present value of wage income plus the present value of assets at the end of year two.
b. the value of initial assets plus the present value of assets at the end of year two. d. the value of intial assets plus the present value of wage income.

29. An increase in the interest rate:
a. makes consumption in period two relatively more expensive compared to consumption in period one. c. makes consumption in period two relatively cheaper compared consumption in period one.
b. does not change relative cost of consuming in either period. d. discourages savings in each period.

30. If a household consumes one less unit in period 1, they can consume:
a. on more unit in period two. c. one less unit in period two.
b. (1 + i) more units in period two. d. no more in period two.

31. Utility in economics is:
a. a product with a derived demand like electricity. c. satisfaction or happiness.
b. usefulness. d. all of the above.

32. Utility in economics:
a. used to mean happiness. c. is what a person gets from a good.
b. used to mean satisfaction. d. all of the above.

33. An increase in the interest rate can cause an income effect by:
a. making future consumption cheaper. c. making present consumption cheaper.
b. changing real income in year two. d. all of the above.

34. An increase in the interest rate:
a. makes future consumption cheaper. c. makes present consumption more expensive.
b. increases future income. d. all of the above.

35. An increase in the interest rate:
a. makes future consumption cheaper. c. makes present consumption cheaper.
b. decreases future income. d. all of the above.

36. An increase in the interest rate:
a. makes future consumption more expensive. c. makes present consumption more expensive.
b. decreases future income. d. all of the above.

37. An increase in the interest rate:
a. makes future consumption more expensive. c. makes present consumption cheaper.
b. increases future income. d. all of the above.

38. An intertemporal substitution effect is caused by a change in:
a. a price from one period to another. c. income.
b. wealth. d. all of the above.

39. The marginal propensity to save out of a temporary change in income is approximately:
a. 1 c. 0
b. 0.5 d. none of the above.

40. The marginal propensity to save out of a permanent change in income is approximately:
a. 1 c. 0
b. 0.5 d. none of the above.

41. The marginal propensity to consume out of a permanent change in income is approximately:
a. 1 c. 0
b. 0.5 d. none of the above.

42. The marginal propensity to consume out of a temporary change in income is approximately:
a. 1 c. 0
b. 0.5 d. none of the above.

43. If a worker receives a one time bonus we would expect them to:
a. save most of it. c. consume most of it.
b. refuse it. d. consume half and save half of it.

44. If a worker receives a bonus every Christmas, we would expect them to:
a. save most of it. c. consume most of it.
b. reject it. d. consume half of it and save half of it.

45. If a person wins $500 in a scratch-off lottery game, we would expect them to:
a. save most of it. c. consume most of it.
b. refuse it. d. consume half and save half of it.

46. If a worker gets a promotion that doubles their salary, with the increase in salary we would expect them to:
a. save most of it. c. consume most of it.
b. reject it. d. consume half of it and save half of it.

47. If the household budget constraint is aggregated over all household, it shows that:
a. consumption plus net investment equal net national product. c. C + K = Y – K
b. consumption plus net investment equals real GDP less depreciation. d. all of the above.

48. If the household budget constraint is aggregated over all household, it shows that:
a. consumption plus net investment equal net national product. c. C – K = Y + K.
b. consumption less net investment equals real GDP less depreciation. d. all of the above.

49. If the household budget constraint is aggregated over all household, it shows that:
a. consumption less net investment equal net national product. c. C – K = Y + K
b. consumption plus net investment equals real GDP less depreciation. d. all of the above.

50. If the household budget constraint is aggregated over all household, it shows that:
a. profit is zero. c. C + K = Y – K
b. PC+ B+P• K = + wL + i(B + PK), d. all of the above.

51. In the multi-year budget constraint the present value of consumption equals the value of initial assets plus the:
a. present value of savings. c. present value of wage incomes.
b. present value of final assets. d. the present value of time.

52. In the two-year household budget constraint, each unit of initial assets is adjusted by
a. multiplying by (1 + io). c. dividing by (1 + io).
b. multiplying by (1 + i1). d. dividing by (1 + i1).

53. In the two-year household budget constraint, each unit of labor in year 2 is adjusted by
a. multiplying by (1 + io). c. dividing by (1 + io).
b. dividing by (1 + i1). d. multiplying by (1 + i1).

54. In the two-year household budget constraint, each unit of conumption in year 2 is adjusted by
a. multiplying by (1 + io). c. dividing by (1 + i1).
b. multiplying by (1 + i1). d. dividing by (1 + i0).

55. For a household budget over two years, suppose the dollar wage rate in year 1 and year 2 equals $12, the price level in year 1 and year 2 equals 2, and the nominal interest rate in year 1 and year 2 equals 3 percent. The total present value of wage income over two years is
a. 24 c. 12
b. 12.18 d. 5.83

56. For a household budget over two years, suppose the dollar wage rate in year 1 and year 2 equals $8, the price level in year 1 and year 2 equals 2, and the nominal interest rate in year 1 and year 2 equals 3 percent. The present value of wage income in year two only is
a. 3.88 c. 4.12
b. 4 d. 5.83

57. Suppose that the present value of a household’s wage income rises. The effect on consumption most likely is
a. zero. c. more consumption in year 2 only.
b. more consumption in both year 1 and 2. d. more consumption in year 1 only.

58. An increase in the interest rate in year 1 leads to
a. an intertemporal substition effect which lowers C1 and lowers C2. c. an intertemporal substition effect which lowers C1 and raises C2.
b. an interpersonal effect which lowers C1 and lowers C2. d. an interpersonal effect which lowers C1 and lowers C2.

59. An increase in the interest rate in year 1 leads to
a. an intertemporal substition effect which raises consumption and saving in year 1. c. an intertemporal substition effect which lowers consumption and raises saving in year 1.
b. an income effect which lowers consumption and saving in year 1. d. an income effect which raises consumption and lowers saving in year 1.

60. For a 2-year household budget constraint, an increase in the interest rate in year 1 leads to which combined effect on consumption?
a. An increase in consumption in year 1. c. A decrease in consumption in year 1.
b. A decrease in consumption in year 1 and an increase in year 2. d. An ambiguous effect.

SHORT ANSWER

1. Derive the household’s two period real budget constraint.

2. What is an intertemporal substitution effect and what can cause one?

3. What is an income effect and what can cause one?

4. What are the effects of an increase in the interest rate on the choice of consumption over time?

5. Show the relationship between the household budget constraint and net national product.

6. Does an increase in permanent income affect household consumption differently than an increase in temporary income?

7. What is the marginal propensity to consume? When would you predict its value to be close to zero?