Econ 212 Exam 1

Suppose that Congress increases Social Security benefits by $50 billion this year. How much will the government expenditures (G) component of GDP change?

0

In response to the OPEC oil embargo of the 1970s and the resulting large increase in the price of oil, the CPI increased more sharply than the GDP deflator. True or false

False See the CPI vs Deflator graph in the PowerPoint slides.

Rank the following assets from most liquid (rank 1) to least liquid (rank 3). google stock cash real estate

2 1 most liquid 3 least liquid

If your goal is to calculate the growth of a nation's output over a ten year period, you should calculate the percentage change in Real GDP over that period.

Real

The interest rate you pay on your credit card balances is an example of a nominal interest rate. t/f

True

The largest component of the CPI basket is housing. True or False

True

The problem of substitution bias leads to an approximately 1%-point overestimate of the inflation rate. True or False

True The problem of substitution bias leads to an approximately 0.4%-point overestimate of the inflation rate.

A checking deposit functions as

a medium of exchange and as a store of value

If an American-based firm opens and operates a new clothing factory in Honduras, then it is engaging in

foreign direct investment

Matt is going to college to become a pharmacist. What he learns about existing information increases

human capital but not technological knowledge Matt's education expands his skill set (human capital), but doesn't improve the state of scientific knowledge concerning pharmacological drugs (technological knowledge).

If a nation's imports total $300 billion and that nation runs a trade deficit of $100 billion, what is the size of that nation's exports?

200 billion

If the real interest rate is 1.5% and the inflation rate is 1.75%, what is the nominal interest rate?

3.25% Using the Fisher Equation: Nominal Interest Rate = Real Interest Rate + Inflation Rate Nominal Interest Rate = 1.5% + 1.75% Nominal Interest Rate = 3.25%

For the past 25 years, consumption represents approximately what proportion of GDP (i.e. C/Y)?

70%

A mutual fund is a financial institution that stands between savers and borrowers is a financial intermediary allows people with small amounts of money to diversify their holdings

All of the above

Educated people may generate ideas that increase production. These ideas produce a return to society from education that is greater than the return to the individual could justify government subsides for education are external benefits of education

All of the above

As depicted in the circular flow diagram, which of the following are considered factors of production (i.e. inputs)?

Capital

Which component of GDP is the largest?

Consumption

The president of Suldinia, a developing country, proposes that his country needs to help domestic firms by reducing trade restrictions. These are outward-oriented policies and most economists believe they would have beneficial effects on growth in Suldinia. These are outward-oriented policies and most economists believe they would have adverse effects on growth in Suldinia. These are inward-oriented policies and most economists believe they would have beneficial effects on growth in Suldinia. These are inward-oriented policies and most economists believe they would have adverse effects on growth in Suldinia.

These are outward-oriented policies and most economists believe they would have beneficial effects on growth in Suldinia. Pro-trade policies are outward oriented; policies designed to restrict foreign exchange are inward oriented policies. The majority of economists believe that trade is growth promoting.

In recent decades Americans have increased their purchase of stocks of foreign-based companies. The Americans who have bought these stocks were engaged in

foreign portfolio investment

Which of the following is an example of physical capital? lumber training received at workshop oil forklift

forklift

Because research and development (R&D) spending can lead to the creation of valuable new ideas, poor nations should focus their spending on R&D rather than education and healthcare. T/F

false

Globally, birthrates have been increasing over the past 40 years. t/f

false

When the government runs a budget deficit

investment is lower than it would be if the budget were balanced

Technological knowledge

is a determinant of productivity

The source of the supply of loanable funds

is saving and the source of demand for loanable funds is investment

Kathleen is considering expanding her dress shop. If interest rates rise she is

less likely to expand. This illustrates why the demand for loanable funds slopes downward

The inputs into production of goods and services that are provided by nature, such as land, rivers, and mineral deposits are called

natural resources

Poor nations often find it very challenging to develop due to the poverty trap phenomena, whereby low levels of current human capital lead to low wages and living standards. This lack of resources also prevents the next generation of workers from obtaining the educational training and health care necessary for future success.

poverty trap

Inventors often obtain patents on new products and processes, thereby turning new ideas into

private goods and increasing the incentive to engage in research Patents give companies exclusive use of an idea/invention, thus creating a private good. Public goods, by contrast, can be used by anyone (e.g. open source software). Because patents create financial rewards for their inventors, it increases the incentive to invent.

In the equation for the production function Y/L represents

productivity

When the government's budget deficit increases

the government is borrowing more and public savings falls

The sale of stocks

to raise money is called equity finance, while the sale of bonds to raise funds is called debt finance

Historically, nations with a higher rate of investment (in physical capital), all else equal, tend to have a higher rate of economic growth. t/f

true

Historically, there are more examples of negative real interest rates than negative nominal interest rates. t/f

true

In order to promote both domestic and foreign investment within a developing nation, it is crucially important that property rights are respected. t/f

true

National Income and National Expenditure must always be equal. True or False

true

The relationship between educational attainment and a nation's living standards is endogenous. t/f

true

Thomas Malthus incorrectly predicted that human population growth would exceed crop yields, thus leading to mass starvation. t/f

true

In the current U.S. CPI basket, healthcare has a greater basket weight than food and beverages. True or False

False

Indexation is the automatic correction of a dollar amount for the effects of real economic growth. True or False

False

Recessions are periods with rising Real GDP. True or False

False

Indonesia launched a program called Progresa in the 1990s with the goal of increasing the educational attainment of children and improving their health outcomes. t/f

False Mexico Launched Progresa in the 1990's

The New York Stock Exchange (NYSE), where existing shares are resold and traded is an example of a primary market. t/f

False NYSE is in the secondary Markets

Which component of GDP is the smallest?

Net Exports

All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?

Output will rise but by less than it did when the previous unit was added

A mutual fund is a financial institution that stands between savers and borrowers is a financial intermediary allows people with small amounts of money to diversify their holdings

all of the above

Which of the following is both a financial institution and a financial intermediary? banks stock exchanges the bond market

all of the above

Which of the following would increase a worker's human capital? more on the job training more formal education being healthier

all of the above

Two of the U.S. economy's most important financial intermediaries are

banks and mutual funds

Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 500. What value of government purchases would make national savings equal to 2,000 and at that value would the government have a deficit or surplus?

1,500, surplus Y = 11,000, C = 7,500, T = 500, NX = 0, National Savings = 2,000, G = ? National Savings (in a closed economy) = Y - C - G 2,000 = 11,000 - 7,500 - G G = 11,000 - 7,500 - 2,000 = 1,500 => G > T, so we have a deficit

In 2015, the value of U.S. Nominal GDP was $18,165 billion, while the value of Real GDP (in 2009 dollars) was $16,471 billion. Using this information, determine the value of the GDP deflator in 2015.

110 Deflator in 2015 = 100x[Nominal GDP in 2015]/[Real GDP in 2015] Deflator in 2015 = 100x[$18,165 billion/$16,471 billion] Deflator in 2015 = 110.285

If the 2015 CPI equals 121 and the 2015 inflation rate is 10%, what was the value of the 2014 CPI? Round your answer to the nearest whole number.

110 Inflation 2015 = 100 x [ (CPI 2015) - (CPI 2014) ] / (CPI 2014) 10 = 100 x [ 121 - (CPI 2014) ] / (CPI 2014) 10 x (CPI 2014) = 100 x [ 121 - (CPI 2014) ] 0.10 x (CPI 2014) = 121 - (CPI 2014) 1.10 x (CPI 2014) = 121 CPI 2014 = 121/1.10 = 110

In 1990, the price of a personal computer was $1,200. If the 1990 CPI equals 129 and the current CPI equals 232, use the indexation technique to convert the price of 1990 PCs into current dollars. Round your answer to the nearest dollar (do not include decimals, dollar signs or commas in your answer; for example, $1,231.76 should be entered as 1232).

2158 Adjusted Value = Original Value x (Current CPI/Original CPI) Adjusted Value = $1,200 x (232/129) Adjusted Value = $2,158.14 or 2158

Suppose that an isolated island pays its workers $700 in total wages, and capital owners $160 in total profits. If the GDP of this island is $1,100, what is the value of rental payments paid to land owners? Round all answers to the nearest whole number and do not include a dollar sign or decimal in your answer (for example, $375.00 should be entered as 375)

240

Suppose that a bartender is able to serve 400 drinks in a four-hour shift. If that same bartender works a 6 hour shift, he is able to serve 540 drinks. During which shift (4-hour or 6-hour) does the bartender have higher labor productivity?

4-hour shift

If GDP equals $14,000 billion, government expenditures (G) equal $2,800 billion, investment (I) equals $2,000 billion, imports (IM) equal $1,000, and exports (EX) equal $1,000, what is the value of consumption (C)?

9200 BILLION

Which of the following is an example of the "brain drain?" A country's most highly educated workers emigrate to rich countries A country has such a poor educational system that human capital falls over time The population of a country grows so fast that the educational system can't keep up A country steals patented technology from another country

A country's most highly educated workers emigrate to rich countries

Which of the following policies will increase total investment? Reduce government budget deficits Reduces taxes on interest income Reduce corporate income tax rates

All of the above

Match the problems with the CPI (on left) with the examples that might cause these problems on the right. Substitution Bias Introduction of New Goods Unmeasured Quality Change

An increase in turkey prices Teenagers in the 1990s purchased CDs; teenagers now purchase MP3 downloads In addition to being cheaper, today's TV's are smarter and have better picture resolution

Determine the missing values in the table below: Basket CPI Year Cost Index 2011 $400 100 2012 $420 105 2013 $500 125

Answer 1 105 Answer 2 125

Use the information below to complete the table (GDP values are in billions of dollars; 2009 is the base year): Nominal Real GDP Year GDP GDP Deflator 2009 $14,419 $14,419 100 2010 $14,964 $14,784 101 2011 $15,518 $15,066 103

Answer 1 14419 answer 2 101 answer 3 15066

Using the drop-down menus, select the missing values below. For the Real GDP calculation, set the base year equal to 2015. Chips Salsa Nominal Real Year Quantity Price Quantity Price GDP GDP 2013 1000 $1.80 100 $3.00 $2,100 $2,300 2014 1100 $1.90 110 $2.70 $2,387 $2,530 2015 1210 $2.00 121 $3.00 $2,783 $2,783

Answer 1 2100 answer 2 2300 answer 3 2387 answer 4 2530

Suppose that the CPI basket consists of 5 pizzas and 3 bottles of soda. Further, consider the following price information for pizza and soda between 2013 and 2015: Year Pizza Soda 2013 $10.25 $1.25 2014 $10.50 $1.50 2015 $11.00 $2.00 Determine the missing values in the table below (set the base year equal to 2014): CPI CPI Year Basket Index 2013 $55 96.5 2014 $57 100 2015 $61 107

Answer 1 55 Answer 2 96.5 Answer 3 57 Answer 4 61 Answer 5 107

According to the 2013 study cited in the video lecture and PowerPoint slides, 97% of computer models overestimated global warming, with model errors averaging 100% .

Answer 1 97% answer 2 100%

Gross Domestic Product (GDP) is the market value of all final goods and services produced in a given nation in a given year.

Answer 1 Market Value Answer 2 Goods and Services

Nominal GDP calculates the value of a nation's output at current prices while Real GDP calculates the value of a nation's output using constant prices.

Answer 1 current Answer 2 constant

We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two bonds have identical characteristics except that Bond A has a term of 20 years and Bond B has a term of 2 years Bond A was issued by the city of Virginia Beach and Bond B was issued by K-Mart Corporation the credit risk associated with Bond A is lower than the credit risk associated with Bond B

Bond A has a term of 20 years and Bond B has a term of 2 years

Which of the following statements is correct? By definition, all natural resources are nonrenewable. Market prices give us reason to believe that natural resources are a limit to economic growth. An economy must be blessed with ample quantities of natural resources if it is to be a highly productive economy. Differences in natural resources can explain some of the differences in standards of living around the world.

Differences in natural resources can explain some of the differences in standards of living around the world.

Match each expenditure to its corresponding GDP component: Sale of Boeing 747 to Brazilian Airline Construction of office tower in Manhattan Purchase of dinner at local restaurant electricity consumption at FBI headquarters Purchase of korean tv

Export Investment Consumption Government Both Import and consumption

Institutions that help to match one person's saving with another person's investment are collectively called the

Financial System

Match each of the following with the appropriate classification: Hair Cut Pizza Purchased For Dinner Lumber Purchased by Construction Company Used car Purchased by Student

Service Final Good Intermediate Good Not Included in GDP

Generally speaking, nations with higher levels of real per capita GDP tend to have populations with higher life expectancy. True or False

True

The U.S. produces virtually no coffee (a minor exception being Kona coffee from Hawaii). If the price of coffee were to increase dramatically, the CPI would increase more than the GDP deflator. True or false

True

The current level of debt (in dollars) is the highest in history, but the debt-to-gdp ratio (National Debt divided by GDP) was at its highest level at the end of World War II. t/f

True

The consumer price index measures changes in the prices of goods and services purchased by typical U.S. firms. True or False

True The CPI measures the price changes of goods and services purchased by households, not firms.

Crowding out occurs when investment declines because

a budget deficit makes interest rates rise

All or part of a firm's profits may be paid out to the firm's stockholders in the form of

dividends

If your firm's production function has constant returns to scale, then if you double all your inputs, your firm's output will

double but productivity will not change Constant returns to scale implies that a doubling of inputs will lead to double the output. However, productivity is unchanged because both output (Y) and labor input (L) are doubling, so the ratio is unaffected: Labor productivity = 2Y/2L = Y/L

If nation A's workers are three times (3x) more productive than the workers in nation B, we would expect that the wages in nation B will be three times higher than the wages in nation A. t/f

false

Mutual funds

provide diversification. Shareholders assume all of the risk associated with the mutual fund

Which of the following will increase a country's real GDP per person? imposing restrictions on foreign trade and foreign investment imposing restrictions on foreign trade and reducing restrictions on foreign investment reducing restrictions on foreign trade and imposing restrictions on foreign investment reducing restrictions on foreign trade and foreign investment

reducing restrictions on foreign trade and foreign investment

Match the factors of production with their corresponding factor payments. Land Labor Capital

rents wages profits