Chapter 2 Study Guide

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Workers in an economy are likely to be more productive if ________. A) the size of the population is high B) the economy has a large physical capital stock C) the unemployment rate in the economy is low D) the rate of inflation in the economy is high

B) the economy has a large physical capital stock

If the income per capita in United Kingdom is £23,800 and the dollar per pound exchange rate is 1.68 in 2014, then income per capita in the United Kingdom in U.S. dollars in the same year is ________. A) $12,812 B) $22,829 C) $30,400 D) $39,984

D) $39,984

The GDP of a small country is $4,150,000, and the size of its employed labor force is 5,000. The income per worker in the country is ________. A) $213 B) $445 C) $620 D) $830

D) $830

In Lutheria, there are 10,000 people in the age group of 0-14 years, 30,000 people are employed, and 2,000 people are unemployed. Lutheria's GDP, measured in luthers, is 1 billion. Income per worker in Lutheria is ________ luthers. A) 10,000 B) 23,667 C) 28,999 D) 33,333

D) 33,333

Which of the following should be used to compare the incomes of countries with equal populations but different unemployment rates? A) Gross national product B) Income per worker C) An exchange-rate-based measure of income per capita D) A PPP-based measure of income per capita

D) A PPP-based measure of income per capita

Which of the following causes the aggregate production function to shift up? A) An increase in physical capital stock B) A decrease in the productivity of workers C) An increase in the total efficiency units of labor D) An improvement in technology

D) An improvement in technology

Which of the following is likely to increase the productivity of workers in an economy? A) An increase in the price level B) The discovery of an oil field C) An increase in the labor force participation rate in the economy D) An increase in the number of years of training that each worker receives

D) An increase in the number of years of training that each worker receives

A bundle of goods that costs $1 in the United States is worth 5 units in Country A's currency. If Country A's GDP in its own currency is 5,000,000 units, Country A's GDP in PPP-adjusted dollars will be ________. A) $1,000,000 B) $2,500,000 C) $3,000,000 D) $50,000,000

A) $1,000,000

Scenario: The price of an iPhone 5s in the United States is $399. The table below lists the income per capita and the price of the same iPhone in the domestic currencies of four different countries in 2014. Country Income per Capita iPhone Price Country 1 15,600 units 999 units Country 2 34,500 units 2,300 units Country 2 22,670 units 10,500 units Country 2 20,000units 1,900 units Refer to the scenario above. The income per capita in Country 2 in PPP-adjusted dollars is ________. A) $5,985 B) $6,834 C) $12,655 D) $4,236

A) $5,985

The following figure shows the total output that an economy can produce using varying amounts of capital. 33) Refer to the figure above. The increase in output due to the same one-unit increase in capital is the greatest at point ________. A) A B) B C) C D) D

A) A

Which of the following is a good measure of the productivity of employed people in a country? A) Income per capita B) Income per worker C) GDP D) Gross national product

B) Income per worker

Refer to the figure above. As physical capital stock increases from the level that corresponds to point B to the level that corresponds to point A, what can be said about aggregate production function 2 relative to aggregate production function 1? A) Output increases relatively faster. B) Output increases relatively slower. C) Output decreases relatively faster. D) Output decreases relatively slower.

A) Output increases relatively faster.

Scenario: The price of a given basket of goods in Country 1 is 10 karls. The price of the same basket of goods in Country 2 is 25 ritz and is $2 in the United States. Country 1 has an income per capita of 3,200 karls, and Country 2 has an income per capita of 5,500 ritz. Refer to the scenario above. The price of a basket of goods worth $1 in the United States is ________ in Country 1. A) 5 karls B) 20 karls C) 25 karls D) 50 karls

A) 5 karls

In a graph that measures output in the y-axis and the efficiency units of labor in the x-axis, which of the following causes an upward movement along the aggregate production function? A) An increase in the total efficiency units of labor B) A decrease in the physical capital stock C) An improvement in technology D) A decrease in the productivity of workers

A) An increase in the total efficiency units of labor

Scenario: The price of an iPhone 5s in the United States is $399. The table below lists the income per capita and the price of the same iPhone in the domestic currencies of four different countries in 2014. Country Income per Capita iPhone Price Country 1 15,600 units 999 units Country 2 34,500 units 2,300 units Country 2 22,670 units 10,500 units Country 2 20,000units 1,900 units Refer to the scenario above. Which country has the highest income per capita in PPP-adjusted dollars? A) Country 1 B) Country 2 C) Country 3 D) Country 4

A) Country 1

Scenario: Two economies, A and B, have identical aggregate production functions with diminishing returns. In both economies, capital and labor are equally important for production. Economy A has twice as many efficiency units of labor as economy B. Economy B has twice as much physical capital stock as economy A. Refer to the scenario above. Over time, economy A develops sophisticated technology, and human capital becomes less and less valuable in the production of goods and services that require more and more physical capital. How will this affect economy A's aggregate production function? A) It will shift up and become less steep if physical capital stock is held constant. B) It will shift up and become less steep if total efficiency units of labor are held constant. C) It will shift to the left if physical capital stock is held constant. D) It will shift to the left and become steeper if total efficiency units of labor are held constant.

A) It will shift up and become less steep if physical capital stock is held constant.

If the aggregate income of an island country is $8 million and income per capita is $5,000, the total population of the island is ________. A) 1,600 B) 20,000 C) 40,000 D) 106,000

A) 1,600

Scenario: The price of a given basket of goods in Country 1 is 10 karls. The price of the same basket of goods in Country 2 is 25 ritz and is $2 in the United States. Country 1 has an income per capita of 3,200 karls, and Country 2 has an income per capita of 5,500 ritz. Refer to the scenario above. A basket of goods worth $1 in the United States has a price of ________ in Country 2. A) 12.5 ritz B) 25 ritz C) 50 ritz D) 320 ritz

A) 12.5 ritz

Scenario: The price of an iPhone 5s in the United States is $399. The table below lists the income per capita and the price of the same iPhone in the domestic currencies of four different countries in 2014. Country Income per Capita iPhone Price Country 1 15,600 units 999 units Country 2 34,500 units 2,300 units Country 2 22,670 units 10,500 units Country 2 20,000units 1,900 units Refer to the scenario above. What is the PPP-based exchange rate between the currency of Country 1 and the U.S. dollar? A) 2.5 units of Country 1's currency for $1 B) 0.4 units of Country 1's currency for $1 C) 1 unit of Country 1's currency for $2.50 D) 1.2 units of Country 1's currency for $1

A) 2.5 units of Country 1's currency for $1

The main reason income per capita and income per worker vary across countries is because ________. A) prices vary across countries B) productivity varies across countries C) currencies vary across countries D) interest rates vary across countries

B) productivity varies across countries

A) 4

A) The PPP-adjusted GDPs differ from the exchange-rate-adjusted GDPs.

The average years of schooling of workers in Argonia has increased. Which of the following is likely to be true if all other variables remain unchanged? A) The efficiency units of labor in Argonia is likely to increase. B) The income per worker in Argonia is likely to decrease. C) The unemployment rate in Argonia is likely to increase. D) The price level in Argonia is likely to decrease.

A) The efficiency units of labor in Argonia is likely to increase.

Which of the following is likely to happen if there is an increase in entrepreneurial activity in an economy? A) The income per capita in the economy will fall. B) The productivity of the economy will increase. C) The inflation rate in the economy will decrease. D) The exchange rate of its currency in the foreign exchange market will increase.

A) The income per capita in the economy will fall.

Inventia has 1 million workers. Suppose 50,000 workers migrate from a neighboring country to join Inventia's workforce. Which of the following will happen in this case if Inventia's physical capital stock remains unchanged? A) The marginal contribution of labor to Inventia's output will fall. B) The relationship between output and physical capital stock becomes negative. C) The total efficiency units of labor in the economy will decrease. D) The country's income per worker will increase.

A) The marginal contribution of labor to Inventia's output will fall.

Refer to the figure above. What does the slope of the aggregate production function 2 between the origin and point A imply? A) The returns for increases in the physical capital stock are decreasing. B) The returns for increases in the physical capital stock are increasing. C) The returns for increases in the physical capital stock are negative. D) The returns for increases in the physical capital stock are first positive and then negative.

A) The returns for increases in the physical capital stock are decreasing.

The value of a vacation home in Italy to its American owner will increase if the ________. A) euro to dollar exchange rate increases B) income per capita in Italy increases C) purchasing power parity (PPP) is relatively greater in the United States D) PPP-adjusted income is relatively greater in Italy

A) euro to dollar exchange rate increases

The ________ in output due to each additional unit of a factor of production is ________ when other factors are held constant. A) increase; smaller B) increase; larger C) decrease; smaller D) decrease; larger

A) increase; smaller

Scenario: Two economies, A and B, have identical aggregate production functions with diminishing returns. In both economies, capital and labor are equally important for production. Economy A has twice as many efficiency units of labor as economy B. Economy B has twice as much physical capital stock as economy A. Refer to the scenario above. If you were to draw the aggregate production functions for economies A and B, holding efficiency units of labor constant, you would draw ________. A) one aggregate production function, where economy B's level of production is greater than economy A's level of production B) two separate aggregate production functions, where the one for economy B lies above the one for economy A C) one aggregate production function, where both economies' output are at the same level D) two separate aggregate production functions, where the one for economy A lies above the one for economy B

A) one aggregate production function, where economy B's level of production is greater than economy A's level of production

Over the course of 10 years, a country's population doubles. During this time, its GDP increases from $10 trillion to $12 trillion. Pete, who lives in this country and buys the same goods and services every year, finds that he is still paying the same price for them. This implies that ________. A) productivity in this country has decreased B) purchasing power parity in this country has decreased C) the country's workforce has more than doubled D) Both A and B

A) productivity in this country has decreased

Refer to the figure above. Assume the economy is at point B of the aggregate production function 2 in 2010. It will move toward point A in 2012 if the ________. A) quantity of physical capital increases and technology remains constant B) quantity of physical capital increases and technology increases C) number of workers increases and technology remains constant D) total efficiency units of labor increase and technology increases

A) quantity of physical capital increases and technology remains constant

The short-run aggregate production function is subject to ________ if capital stock is increased, holding the total efficiency units of labor constant. A) the Law of Diminishing Marginal Product B) decreasing opportunity cost of production C) increasing opportunity cost of production D) increasing returns to scale

A) the Law of Diminishing Marginal Product

The value of Japan's income per capita in dollars will increase if ________. A) the dollar per yen exchange rate increases B) the dollar per yen exchange rate decreases C) the U.S. income per capita increases D) the value of Japan's income per capita in yen decreases

A) the dollar per yen exchange rate increases

A country's unemployment rate fell from 6 percent to 5 percent during a year. If the country's total population, physical capital stock, and output remain unchanged, ________. A) its income per capita will fall B) its income per worker will fall C) its income per capita will increase D) its income per worker will increase

B) its income per worker will fall

If a foreign company operating in a country changes work rules, resulting in a more flexible allocation of resources in the various sectors of the domestic economy, ________. A) the productivity of the domestic workers is likely to increase B) the productivity of the domestic workers is likely to decrease C) the GDP of the economy is likely to decrease D) the Human Development Index of the country is likely to decrease

A) the productivity of the domestic workers is likely to increase

The total efficiency units of labor in a country is 6,000. If the average efficiency of each worker in the economy doubles, the efficiency units of labor in the country will be ________, everything else remaining unchanged. A) 300 B) 12,000 C) 36,000 D) 48,500

B) 12,000

Suppose the average productivity of workers in Country A is equal to that of workers in Country B. If Country A has higher total efficiency units of labor than Country B, it implies that ________. A) Country B has a larger supply of workers B) Country A has a larger supply of workers C) Country A has a larger stock of capital D) Country B has a larger stock of capital

B) Country A has a larger supply of workers

Which of the following is true? A) Exchange-rate-based measures of income per capita are identical to PPP-based measures of income per capita. B) Exchange-rate-based measures of income per capita differ from PPP-based measures of income per capita. C) The gap between the income per capita in the United States and the income per capita in poorer countries is large when PPP-based measures are used. D) The gap between the income per capita in the United States and the income per capita in poorer countries is small when exchange-rate-based measures are used.

B) Exchange-rate-based measures of income per capita differ from PPP-based measures of income per capita.

A country's physical capital stock decreases after a war while its labor supply remains constant. Which of the following will happen in this case if output is a function of physical capital stock and the efficiency units of labor? A) Its total output will remain constant. B) Its total output will decrease. C) Its per capita output will increase. D) Its per capita output will remain constant.

B) Its total output will decrease.

Country A has a smaller stock of capital than Country B, but the supply of labor in both countries is equal. What does this imply? A) The increase in output due to the use of an additional unit of capital will be smaller in Country A than in Country B. B) The increase in output due to the use of an additional unit of capital will be larger in Country A than in Country B. C) The use of an additional unit of capital will increase output in Country A only if there is an increase in the total efficiency units of labor. D) The use of an additional unit of capital will increase output in Country B only if there is an increase in the total efficiency units of labor.

B) The increase in output due to the use of an additional unit of capital will be larger in Country A than in Country B.

The total number of workers in two different countries is equal. However, workers in Country A are three times more productive than workers in Country B. Which of the following is true in this case? A) The total efficiency units of labor in Country A is one-third the total efficiency units of labor in Country B. B) The total efficiency units of labor in Country A is three times more than the total efficiency units of labor in Country B. C) The physical capital stock in Country B is three times more than the physical capital stock in Country A. D) The total efficiency units of labor in Country B is six times more than the total efficiency units of labor in Country B.

B) The total efficiency units of labor in Country A is three times more than the total efficiency units of labor in Country B.

Refer to the figure above. Which of the following statements hold true regarding aggregate production function 2? A) Up to point A, the law of diminishing marginal product holds for human capital. B) Up to point A, the law of diminishing marginal product holds for the physical capital stock. C) Up to point A, increases in the physical capital stock lead to decreased output. D) Up to point A, increases in human capital lead to constant aggregate output.

B) Up to point A, the law of diminishing marginal product holds for the physical capital stock.

Country A's income per capita is higher than that of Country B. Country A is likely to have ________. A) a higher unemployment rate B) a higher life expectancy at birth C) a lower life expectancy at birth D) a higher exchange rate

B) a higher life expectancy at birth

An economy with better technology is likely to ________. A) use more labor than capital B) achieve higher productivity C) have a small physical capital stock D) have lower levels of human capital

B) achieve higher productivity

The total efficiency units of labor in an economy increases if ________. A) each worker earns a lower wage B) each worker becomes more productive C) the average number of hours worked by each worker decreases D) the amount of capital available to each worker diminishes

B) each worker becomes more productive

The Human Development Index combines ________, life expectancy, and measures of education to measure the standard of living in a country. A) income per worker B) income per capita C) GDP D) gross national product

B) income per capita

If the population of a country increases, GDP remaining constant, then its ________. A) income per capita will remain unchanged B) income per capita will decrease C) trade deficit will decrease D) gross national product will increase

B) income per capita will decrease

Scenario: In Riverland, life expectancy is rising and has just surpassed life expectancy in its neighbor country, Lakeland. 31) Refer to the scenario above. As life expectancy is rising further in Riverland, its Human Development Index likely will ________. A) increase by definition of the index B) increase, because life expectancy and GDP per capita are often highly correlated C) decrease, because GDP per worker will decrease as retired workers live longer D) increase or decrease, depending on changes in productivity and other variables that constitute the index

B) increase, because life expectancy and GDP per capita are often highly correlated

The aggregate production function shows a(n) ________ relationship between ________ and output. A) decreasing; physical capital stock B) increasing; physical capital stock C) constant; labor D) decreasing; labor

B) increasing; physical capital stock

Xenonia has a larger supply of labor than does Inventia. If the labor supply in both countries increases by the same amount while their physical capital stocks remain unchanged, ________. A) the increase in Xenonia's output will be more than the increase in Inventia's output B) the increase in Inventia's output will be more than the increase in Xenonia's output C) Xenonia's income per capita will increase, while Inventia's income per capita will decrease D) Xenonia's income per capita will decrease, while Inventia's income per capita will increase

B) the increase in Inventia's output will be more than the increase in Xenonia's output

The GDPs of Country X and Country Y were found to be equal in a particular year. However, the income per capita in Country X was higher than the income per capita in Country Y. This implies that ________. A) the population of Country X is higher than the population of Country Y B) the population of Country X is lower than the population of Country Y C) the number of workers in Country X is higher than the number of workers in Country Y D) the number of workers in Country X is lower than the number of workers in Country Y

B) the population of Country X is lower than the population of Country Y

The currency used in Spain is the euro, and the currency used in the U.S. is the dollar. Which of the following will lead to a decrease in the value of Spain's income per capita in dollars? A) An increase in the dollar per euro exchange rate B) A decrease in the dollar per euro exchange rate C) A decrease in the income per capita in the United States D) An increase in the value of Spain's income per capita in euros

B)A decrease in the dollar per euro exchange rate

C) $10,000

Suppose the price of an iPad is $500 in the United States and 30,000 rupees in India. If an iPad is representative of the average prices in a country, then the price of a basket of goods worth $1 in the United States costs ________ rupees in India. A) 0.17 B) 2 C) 60 D) 100

C) 60

Refer to the figure above. Which of the following statements holds true regarding aggregate production function 2? A) Up to point B, as aggregate output increases, physical capital also increases. B) As physical capital increases, aggregate output remains constant. C) As aggregate output increases human capital remains constant. D) Up to point A, as aggregate output increases, human capital also increases.

C) As aggregate output increases human capital remains constant.

Why might we want to use the Human Development Index to compare standards of living between countries? A) Because countries may have different currencies, so that we cannot compare GDP per capita. B) Because we need to adjust for purchasing power parity between countries. C) Because other factors, such as schooling and life expectancy, might vary between countries even if they have the same GDP per capita. D) Because GDP per capita is inaccurate when there is income inequality in a country.

C) Because other factors, such as schooling and life expectancy, might vary between countries even if they have the same GDP per capita.

The GDPs of four countries in a continent are equal. The number of people employed in each country is shown in the table below: Country Number of People Employed Country 1 100,000 Country 2 52,000 Country 3 45,000 Country 4 125,000 Which country has the highest income per worker? A) Country 1 B) Country 2 C) Country 3 D) Country 4

C) Country 3

Suppose a country's labor supply increases in a year while its physical capital stock remains constant. Which of the following is likely to happen in this case if output is a function of capital and the total efficiency units of labor? A) Its output per capita will decrease. B) Its total output will decrease. C) Its total output will increase. D) Its total output will remain constant.

C) Its total output will increase.

Scenario: In Riverland, life expectancy is rising and has just surpassed life expectancy in its neighbor country, Lakeland. 30) Refer to the scenario above. This implies that ________. A) Riverland's per capita GDP has surpassed Lakeland's B) Riverland's Human Development Index has surpassed Lakeland's C) Riverland's Human Development Index likely will be greater than Lakeland's if its per capita GDP is greater and schooling is of similar length and quality D) Riverland's per capita GDP likely will be greater than Lakeland's if the Human Development Index is greater

C) Riverland's Human Development Index likely will be greater than Lakeland's if its per capita GDP is greater and schooling is of similar length and quality

) The income per capita was equal in two neighboring countries in a particular year. However, Country 1 had a higher income per worker than Country 2. Which of the following is likely to be true? A) The number of retired people will be higher in Country 2 than in Country 1. B) The number of children younger than 15 will be higher in Country 2 than in Country 1. C) The number of people employed will be higher in Country 2 than in Country 1. D) The number of people unemployed will be lower in Country 1 than in Country 2.

C) The number of people employed will be higher in Country 2 than in Country 1.

The productivity of workers in an economy will be high if the economy has ________. A) a large working age population B) a negative rate of inflation C) high levels of human capital D) a small physical capital stock

C) high levels of human capital

Refer to the figure above. At point B of aggregate production function 2, a one unit increase in the physical capital stock will lead to a ________. A) one unit increase in aggregate production B) one unit increase in aggregate production if the human capital stock also increases by one unit C) less than one unit increase in aggregate production D) more than one unit increase in aggregate production

C) less than one unit increase in aggregate production

The income per capita in a country with a population of 50,000 is $4,500. Its GDP is ________. A) $54,500 B) $900,000 C) $120,000,000 D) $225,000,000

D) $225,000,000

The GDP of a small country with a population of 200,000 is $56,000,000. The income per capita in the country is ________. A) $50 B) $100 C) $200 D) $280

D) $280

The following figure shows two aggregate production functions. 1) Refer to the figure above. Which of the following best describes the difference between aggregate production functions 1 and 2? A) Human capital is higher for function 1. B) Physical capital stock is higher for function 1. C) The returns for increases in physical capital stock are higher in function 1. D) Better technology is employed in function 1.

D) Better technology is employed in function 1.

The following figure shows the total output that an economy can produce using varying amounts of capital. Refer to the figure above. The increase in output due to a one-unit increase in capital is the smallest at point ________. A) A B) B C) C D) D

D) D

In France and Spain, a Big Mac costs 1 euro. Yet the standard of living is higher in ________. A) Spain if a Big Mac is only a small part of people's consumption and Spain's GDP per capita is higher B) France if its exchange rate is higher C) Spain if all other goods are cheaper in Spain than in France D) France if all other goods also cost the same in Spain and France but the GDP per capita is higher in France

D) France if all other goods also cost the same in Spain and France but the GDP per capita is higher in France

Scenario: The price of a standard basket of goods in Country A is 10 pesos. The price of the same basket of goods in country B is 25 francs and $5 in the United States. Country A has an income per capita of 60,000 pesos, and country B has an income per capita of 100,000 francs. Assume full employment in both countries. Refer to the scenario above. Suppose Country A passes a law that requires all workers to complete repeated safety workshops. One year after the law was passed, workers are on average 5 percent less productive. Workers in Country B continue to produce at the same rate as the year before. During the same year, the population in Country A and in Country B increases by 2 percent. Consequently, 1 year after Country A passed the new law, ________. A) workers in Country B on average are more productive than workers in Country A B) GDP in Country A increases, but GDP in Country B may or may not increase C) GDP per capita in Country A decreases, and GDP per capita in Country B increases D) GDP per capita in Country A decreases, while GDP in Country A may or may not increase

D) GDP per capita in Country A decreases, while GDP in Country A may or may not increase

Which of the following should be used to compare the incomes of countries with huge differences in the cost of living? A) Gross national product B) Income per working age population C) Exchange-rate-based measures of income per capita D) PPP-based measures of income per capita

D) PPP-based measures of income per capita

Country A and Country B happen to have the same GDP per capita. The standard of living is said to be higher in Country A than in Country B. This could be because ________. A) the workforce in Country A is relatively bigger B) productivity is relatively greater in Country A C) the same goods and services are relatively more costly in Country A D) high income disparity in Country B prevents its GDP per capita from giving a full picture of the well-being of its people

D) high income disparity in Country B prevents its GDP per capita from giving a full picture of the well-being of its people

Suppose the number of people employed in a country increases. Everything else remaining unchanged, this will lead to a fall in the country's ________. A) GDP B) gross national product C) consumer price index D) income per worker

D) income per worker

D) it employs more advanced technology in production than does economy B

The total efficiency units of labor is obtained by ________. A) dividing the total physical capital stock of an economy by the total number of workers B) multiplying the total population of an economy by the average amount of capital available to each worker C) dividing the total number of workers in an economy by the average efficiency of each worker D) multiplying the total number of workers in an economy by the average efficiency of each worker

D) multiplying the total number of workers in the economy by the average efficiency of each worker

An aggregate production function shows ________. A) various combinations of labor and capital that can be used to produce a particular good B) various quantities of two goods that can be produced at a given cost C) the relationship between a country's output and its price level D) the relationship between a country's GDP and its factors of production

D) the relationship between a country's GDP and its factors of production

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