EC202 Exam 1

Birmingham Steel sells steel to Winston Golf Club Manufacturers for $300,000. Winston sells its golf clubs to Academy Sports for $1,000,000. Academy Sports sells Winston golf clubs for $1,500,000. How much is added to GDP?

$1,500,000

* A price ceiling

* A. is a maximum price allowed by the law. B. is only effective if it is below the equilibrium price in a market. C. will lead to a persistent shortage of a product, if it is effective.

* Why did the Civil Aeronautics Board (CAB) limit entry into the airline industry until 1978?

* The CAB had to enforce the price floor.

*If the current market price of baseballs is $5 and the government imposes a price ceiling of $4, what are the expected market results?

* The market price will be $4 and there will be a decrease in the market quantity.

*In practice, rent controls are typically set

* below the equilibrium rent.

* T or F: A large increase in the minimum wage will have the same effect on the labor market as a small increase.

* false

*A minimum wage is an example of a

* price floor

*Misallocation of resources results when price controls are imposed, because _______ no longer sends the correct signal to move resources from ___________ valued uses to ________ valued uses.

* the price; lower; highest

*T or F: When sellers are legally prevented from raising prices, they tend to increase quality to attract more buyers.

* true

*When a price floor is set at the equilibrium price, quantity supplied

* will be equal to quantity demanded

*Deregulation of the airline industry

*B. reduced quality. C. lowered prices. D. increased quantity.

* In 1938, Congress passed the Fair Labor Standards Act. What was the purpose of this Act?

*The Act set the first minimum wage for the United States at 25 cents per hour.

*Suppose that milk has a market equilibrium price of $4.00 a gallon and the U.S. government decreases the maximum legal price allowed from $3.50 a gallon to $2.00 a gallon. What will happen?

*There will be a greater shortage of milk.

*In general, minimum wage laws in the United States affect which of the following groups?

*low-skilled workers

*President Nixon imposed price controls when the price of heating oil was

*near its seasonal low.

*Price floors cause larger surpluses

*the higher they are above the equilibrium price.

*Increases in the minimum wage reduce employment among

*the least skilled workers.

*T or F: Bribes can be a more efficient allocation of resources than waiting in line.

*true

If nominal GDP is $5.43 (in billions) in 2007 and in the year 2008 the level of nominal GDP rises to $6.11 (in billions), what is the growth rate of nominal GDP?

12.5%

The value of a car produced and sold in 2000, and sold again in 2008, should be included in GDP for

2000 only

What has been the long-term average rate of real GDP growth in the U.S. since World War II?

3.5%

The basic postulate of economics indicates that changes in incentives influence the:

A. choices of individuals with regard to a wide range of activities, including those generally perceived as social or political.

A decrease in income causes the demand to ________ for a normal good, and an increase in income causes the demand to ________ for an inferior good.

decrease, decrease

OPEC is able to raise oil prices by:

decreasing the supply of oil by cutting production

In 1980 when Iraq attacked Iran, the price of oil _______ because of a(n) ______.

increased; disruption in the supply of oil

The most volatile component of GDP is

investment.

GDP can be defined as the

market value of all final goods and services produced within a country in a given year.

A business cycle refers to ___________ movements in _________ around ________.

short-run; real GDP; a long-term trend in real GDP

What is the best definition of a recession?

significant, widespread decline in real income and employment

Which of the following answer choices contain factors that you think would create a suitable environment for achieving economic growth?

A. well functioning markets, removal of price controls, and good health care systems B. well functioning markets, property rights, and firm creativity C. development of physical and human capital per worker, and technological advancement

You must decide whether to attend class tomorrow morning or take your friend to the airport. Your decision highlights the following "big idea" in economics.

Trade-offs are everywhere.

T or F Monetary and fiscal policies are among a government's tools for mitigating economic fluctuations.

True

Hot dogs and hot dog buns are complementary goods. Which of the following would cause the demand curve for hot dog buns to shift to the right?

a fall in the price of hot dogs

Which of the following answer choices contains only factors that cause the supply curve to shift to the right?

a rise in technology, a fall in the costs of production, a fall in taxes on output

When a surplus exists in a market, we know that the actual price is:

above equilibrium price and quantity supplied is greater than quantity demanded.

Michael graduates and his income increases by $40,000 a year. Other things remaining the same, he decreases the quantity of pizza he buys. For Michael, pizza is:

an inferior good.

Which of the following phenomena occurred during the Great Depression?

All of the answers are correct.

GDP is equal to:

Consumption + Investment + Government Spending + Net Exports

Suppose that after a substantial increase in the price of housing, consumers now begin to believe that the price of housing will be lower next period. What will happen in the market for housing as a result of these expectations?

Demand for housing will begin to fall, and the price of housing will decrease.

T or F If the price of ski lift tickets increases, the demand for ski lift tickets will decrease.

False

T or F The cause of business cycles is well understood and as such their beginning and ending points are easily predicted.

False

How does self-interest relate to creativity by firms (in terms of production methods or product attributes)?

Firms are interested in making profits, and so they are creative and innovative in order to realize those profits.

Gross Domestic Product (GDP) differs from Gross National Product (GNP) in that

GNP measures the production of a country's citizens within a country's borders and in other countries.

Why do grocery stores offer "buy one, get one half off" specials? I. It's a way to offer an incentive to consumers (who might not ordinarily buy two units of the same item) to buy the extra item. II. They are thinking at the margin, and they stand to make positive profit even if they sell the second unit at a lower price than the first unit. III. Government regulations require them to hold such promotions from time to time.

I and II

Which among the following would reduce economic growth: I. weak property rights II. political instability III. corrupt government

I, II, and III

Suppose you accept a job in Mexico after college, your income will be part of GDP in

Mexico only

Tim, a citizen of the United States and living in Virginia, buys a computer that is made in South Korea by a Japanese firm. This transaction would affect the GDP of the United States in which way?

Net exports would decrease and GDP would be unaffected.

What is a plausible economic explanation as to why Braille "dots" are commonly found on drive-up automatic teller machines?

The cost of making two different types of keypads, at the margin, is substantial, and the benefit of providing keypads without the Braille dots is a mere inconvenience to ATM users.

The U.S. government limits the importation of Chinese-made bras. What effect does this trade restriction have on the market for bras?

The equilibrium price will increase and the equilibrium quantity will decrease.

Economic growth in China is leading to more Chinese people owning cars. What effect does this have on oil markets?

This leads to an increased demand for oil, which causes oil prices to rise.

Why is real GDP not seen as a perfect measure of the actual total production in an economy?

because it does not count the underground economy or nonmarket production

Economists think that people are self-interested:

because they respond to incentives in predictable ways.

Adam Smith's metaphor of the "invisible hand" refers to the notion that:

behavior based on self-interest can lead to an overall benefit to society.

Part of investment spending, when considering the national income approach to calculating GDP, is the acquisition of which of the following?

capital good

Final goods are goods

consumed or held in personal inventories

In the United States, the largest component of GDP is

consumption

If nominal GDP rose in 2008, we can conclude that

either production or the price level, or both, rose in 2008

T or F Excess money printing by central banks always causes inflation and economic busts.

false

Booms and busts refer to the:

fluctuations in economic activity over time.

Which of the following would increase the demand for beef?

higher consumer income

Most economists believe that an increase in the supply of money results in:

higher inflation in the long run

In several cities around the country, schools are paying cash awards to students who do well on English and Math tests. This practice highlights the idea of:

incentives—the rewards and penalties that motivate behavior.

Recall the chapter opening story about the British sea captains and the convicted felons. Instead of paying the sea captains for each prisoner placed on board the ships in Great Britain, an economist suggested

paying for each prisoner who walked off the ship in Australia.

You observe that the price of coffee has increased, yet evidence suggests demand for coffee has been stable; you surmise a possible explanation is that:

poor weather in coffee-producing countries may have affected production.

The quantity supplied of oil is the amount that:

producers plan to sell during a given time period at a given price.

Tampering with the laws of supply and demand:

produces consequences

If real GDP rose in 2008, we can conclude that

production rose in 2008

The central bank of the United States is:

the Federal Reserve.

Quantity demanded is:

the amount of a good or service that a buyer is able and willing to purchase at a given price.

Inflation can be defined as:

the increase in the general level of prices in an economy.

If sellers want to sell more products than buyers are willing to purchase, we know that:

the market price is greater than the equilibrium price.

A nation has automobile factories, grows legal marijuana, and does not allow its women to work outside the home. What will be counted in GDP?

the sale of automobiles and the marijuana

The opportunity cost of a choice is:

the value of the opportunities lost