Econ Test 3
Which of these statements about the benefits of economic growth is true?
Economic growth can help people at all income levels.
Which of these government policies can help economic growth?
Ensuring political stability and relatively little corruption
In the circular flow of expenditure and income, why must the total value of production in an economy equal the total value of income?
Every penny spent on a good or service must end up as someone's income
What happens if we measure GDP by adding up the value of every good and service produced in the economy?
GDP is overestimated because of double counting.
When a significant fraction of domestic production takes place in foreign-owned facilities, a country's difference between GDP and GNP is as follows:
GDP will be much larger than GNP
Why does the shadow economy matter?
Having a large shadow economy may be a sign that government policies are making it difficult for many businesses to operate openly
GDP is an imperfect measure of economic well-being because it fails to measure what types of production? Even if GDP included these types of production, why would it still be an imperfect measure of economic well being?
Household production and the underground economy. All of the above- Not crime adjusted- value of leisure not included- Not adjusted for pollution and unequal distribution
Which of these statements about interest rates and inflation is true?
If there is zero inflation, the nominal interest rate is equal to the real interest rate
The role of the entrepreneur becomes much more important in the new growth theoryLOADING...—the endogenous growth model—than in the traditional economic growth modelLOADING... because
In the new growth theory, entrepreneurs play a key role in the development and adoption of new and sometimes untried technologies.
When low income countries begin to experience economic growth, they often do so at rates much higher than current growth rates of industrial nations. Which of the following does not provide an explanation of this phenomenon?
Industrial countries have higher rates of growth in physical capital and developing countries are not able to invest in large quantities of capital.
Which of the following is not a cost created by high inflation
Inflation causes the real wage to fall which means that firms have to pay more for workers.
Which of these is not a shortcoming of GDP as a measure of welfare?
It only counts final goods and services and not intermediate goods
An article in the Wall Street Journal in mid-2019 noted, "Until now, Mexico has been seen as a winner in the trade dispute between the U. and China." Source: Santiago Pérez, "Trump's Mexico Tariff Threat Trips Up Manufacturers Shifting Out of China," Wall Street Journal, June 2, 2019. What does the article mean by a "trade dispute"? How might Mexico gain from a trade dispute between the United States and China? Assuming the United States imposes tariffs on Chinese exports to the United States, Mexico benefits from the trade dispute because
It refers to the situation that occurs when two countries impose tariffs and non-tariff barriers on each other. only A and B are correct
Increases in the minimum wage will
increase unemployment among teenagers. lower; more stringent
Even though individuals earn interest on financial investments such as bonds, mutual funds, and certificates ofdeposits, they may still hold wealth in checking accounts because
individuals need money that is available to be spent on goods and services
Which of these is (are) most likely to increase productivity?
investments in research and development
If inflation is anticipated, _________________.
it costs less to society than if unanticipated
The economic growth model predicts that the Have poor countries been catching up to rich countries?
level of per capita GDP in poor countries will increase faster than rich countries and the poor nations will catch up with the rich nations. There has been catch-up by some poor but industrialized countries
What is the relationship between investment and real interest rates, all other things being equal?
lower interest rates stimulate investment
The __________ the interest rate, the more investment projects firms can profitably undertake, and the __________ the quantity of loanable funds they will demand
lower; greater
In calculating the CPI, the _________________
market basket does not include large equipment purchased by firms
Which of these is a function that the financial system provides for savers and borrowers?
matching savers and borrowers
The consumer price index ___________________
measures the cost of an unchanging basket of goods and services
Which of these factors does not contribute to economic growth?
nationalization of foreign investments
Economic variables that are calculated in current year prices are referred to as __________ variables, while variables that have been corrected to account for the effects of inflation are __________ variables.
nominal, real
An article in the Wall Street Journal contained the following observation: "Every month, millions of workers leave the job market because of retirement, to care for children or aging parents, to pursue more education, or out of discouragement. Millions of others jump in after graduating." Source: Josh Zumbrun, "Labor-Market Dropouts Stay on the Sidelines," Wall Street Journal, December 28, 2014. The millions of workers leaving the job market for the reasons given are
not counted as unemployed in the BLS data because they are no longer actively looking for work. be counted as part of the labor force by the BLS if they are actively looking for work
Inflation can affect the distribution of income because
people with incomes rising faster than the rate of inflation enjoy an increasing purchasing power, while people with incomes rising more slowly than the rate of inflation are hurt by a decreasing purchasing power
Disposable personal income is equal to personal income minus:
personal tax payments
The new growth theory states that The new growth theory differs from the growth theory developed by Robert Solow, since
firms will add to an economy's stock of knowledge capital by engaging in research and development or by contributing to technological change. the Solow growth theory focuses on technological change and the quantity of capital available to workers whereas the new growth theory states that accumulation of knowledge capital is a key determinant of economic growth.
A patent is government protection that gives an inventor exclusive rights to profit from their invention __________.
for a period of 20 years
When a firm buys or builds facilities in a foreign country it is known as:
foreign direct investment
When an individual investor or another firm acquires more than 10 percent ownership in a foreign firm it is known as __________.
foreign direct investment
When the economy is at full employment, which types of unemployment remain?
frictional and structural
The short-term unemployment that arises from workers, in the process of changing jobs, is called __________.
frictional unemployment
The BLS defines a job quit as a "voluntary separation initiated by an employee." The BLS estimated that there were 5.4 million job quits in March 2019. Source: Bureau of Labor Statistics, "Job Openings and Labor Turnover Survey—March 2019," May 7, 2019. Unemployment caused by an increase in job quits would be classified as An increase in the number of job quits would suggest that it is becoming
frictional unemployment easier to find jobs because employees who leave voluntarily are confident of finding another one
Crowding out occurs when
governments must borrow funds which causes interest rates to rise and thus private investment is reduced
Between 1950 and the mid-1990s, the United States experienced a much larger increase in the standard of living than the Soviet Union. This difference can be most attributed to the fact that the U.S. Which of the following is a reason the U.S. experienced larger economic growth than the Soviet Union? (Check all that apply.)
had a greater amount of technological change The U.S. had a greater amount of private property rights. The U.S. had a market economy that allowed for greater entrepreneurship to occur.
Economic growth initially leads to __________.
higher living standards
Before capital accumulation can take place, __________.
household savings must be converted into business investment
In the circular flow model, who supplies factors of production in exchange for income?
households
The flow of funds from _____________ into the financial system makes it possible for government and firms to borrow
households
Of the eight categories in the CPI market basket, which three categories make up more than 75% of the basket?
housing, transportation, and food
Labor productivity can be increased through investments in __________.
human capital
Unanticipated deflation __________.
hurts net debtors
Which of these government policies can help economic growth?
promoting the existence of an efficient financial system
The GDP per capita is computed by dividing a country's:
real GDP by it's population
The defining characteristic of long-run economic growth is:
rising productivity
An International Monetary Fund Factsheet made the following observation regarding sound financial systems: "Acountry's financial system . . . help[s] channel savings into investment, thereby supporting economic growth." Source: "Financial System Soundness," International Monetary Fund Factsheet, March 27, 2019. a. Briefly explain how the financial system channels savings into investment.
savers provide funds to firms by buying the firms' stocks and bonds and by depositing funds in banks
Economic growth will Some economies are able to maintain high growth rates despite diminishing returns to capital by using
slow down or stop if more capital per hour is used because of diminishing returns to capital better or enhanced technology, along with accumulating capital; these economies are growing becausetechnology, unlike capital, is subject to increasing returns.
The total national income actually received by a country's residents is:
smaller than the value of GDP
Which of these factors contributes to economic growth?
technological progress
The application of mechanical power to the production process that started in England around 1750 is known as:
the Industrial Revolution
The cycle of short-term ups and downs in the economy is called:
the business cycle
If technological change increases the profitability of new investment to firms, which of these will occur?
the demand for loanable funds will increase
Consider the following relationship: Y = f(K, L, A). To measure technological progress, we observe:
the impact of changes in A on K and L.
Capital can be differentiated between physical capital and human capital. Human capital is
the knowledge and skills workers acquire from education and training or from their life experiences
Gross domestic product is best defined as the:
the market value of all final goods and services produced in a country during a period of time
The labor force participation rate is calculated by
the percentage of the working-age population that is in the labor force or Labor forceWorking−age population×100.
When population growth results in a lower output per worker, it is an illustration of which key principle in economics?
the principle of diminishing returns
As the economy nears the end of an expansion, which of the following typically occurs?
the profits of firms will be falling, wages are usually rising faster than prices, interest rates are usually rising
Which of the following is included in the economist's definition of investment?
the purchase of new machines, factories, or houses
Which of the following is included in the economist's definition of investment?
the purchase of new machines, factories, or houses
The natural rate of unemployment is When the economy is at full employment, unemployment is equal to
the sum of frictional and structural unemployment the natural rate of unemployment
Which of these groups is included in the labor force?
the unemployed
Real GDP is:
the value of goods and services evaluated at base year prices
The type of inflation that is a greater problem to society is
unanticipated inflation, since it causes greater redistribution of income between those making payments and those awaiting payments in the future
The buying a selling of goods and services that is hidden from the government in order to avoid taxes and/or regulation is known as the:
underground economy
The natural rate of unemployment is the _______________
unemployment rate that results when the economy produces the potential level of real GDP
When Ségolène Royal was running unsuccessfully for president of France, she proposed that workers who lost their jobs would receive unemployment payments equal to 90 percent of their previous wages during their first year of unemployment. Source: Alessandra Galloni and David Gauthier-Villars, "France's Royal Introduces Platform Ahead ofElection," Wall Street Journal, February 12, 2007, p. A.8. If this proposal were enacted, the unemployment rateLOADING... in France
would have gone up as the opportunity cost of job search would have decreased.
What are the four major components of expenditures in GDP?
Consumption, Investment, Government Purchases, and Net Exports
Which of the following statements about compounding is correct?
Compounding magnifies even small differences in interest rates or growth rates over long periods of time.
To obtain prices of a representative group of goods and services, the Bureau of Labor Statistics (BLS) conducts a monthly survey of __________ households nationwide on their spending habits. The results of this survey are used to construct a market basket of __________ types of goods and services purchased by the typical urban family of four.
14,000; 211
If real GDP equals $11,567 billion in 2006 and $11,916 billion in 2007, and assuming population is constant over those two years, how many years will it take for real GDP per capitaLOADING... to double? 23.323.3 years. (Enter your response as a real number rounded to one decimal place.)
23.3
Which letter best represents the demand for factors of production in this circular flow model?
C
Which of the following is not counted as final goods and used in the GDP calculation?
Intermediate goods
An article in the Wall Street Journal has the headline "What Is the Shadow Economy and Why Does It Matter?" Source: Simon Constable, "What Is the Shadow Economy and Why Does It Matter?" Wall Street Journal, March 5, 2017. Briefly answer the two questions asked in the headline. What is the shadow economy?
It is the part of the economy where the buying and selling of goods and services is concealed from the government.
Which of the following is the best example of human capital?
a worker gets a college degree
The process by which competition for monopoly profits leads to technological progress is called:
creative destruction
At full employment, ________________
cyclical unemployment is zero
The "normal or natural" underlying level of unemployment in the economy is the __________.
full employment rate of unemployment
Property rights have been determined to be a major factor that helps countries sustain economic growth. Governments can change laws and policies in order to give individuals and firms more freedom. By doing so, government can help promote growth because greater property rights
give entrepreneurs more incentive to take risks that create new products, ideas, and more technology.
Unemployment arising from a persistent mismatch between the skills and characteristics of workers and job requirements is called __________.
structural unemployment
Which of these will ensure an economy experiences sustained economic growth?
technological change
Which market basket specifically targets intermediate goods?
the basket used by the producer price index
Why do economists believe that setting a goal of zero percent unemployment is not feasible or desirable? Creating a goal of zero percent unemployment for an economy is not feasible nor is it desirable because
the economy needs short-term unemployment in order to allow for better matching of jobs with workers that possess the proper skill sets
To calculate personal income from national income, which of the following must be done by the BEA?
Add government transfer payments
Which of these demographic groups typically suffers from higher unemployment rates?
African Americans
If the CPI was 207 in 2007 and 225 in 2011, what pay raise would someone who earned $50,000 in income in 2007 have to receive in order to keep her purchasing power constant in 2011?
$4,348
Suppose the CPI in 2008 was 215.3 and the CPI in 2009 was 214.6, what was the inflation rate between 2008 and 2009?
-0.3 percent
Recessions cause the inflation rate to _________, and the unemployment rate to _________.
decrease, increase
Which measures of GDP represents changes in quantity of goods and services produced in the economy, holding prices constant?
Real GDP
An article in the Wall Street Journal notes, "Productivity improvements are a key ingredient for the U.S. economy to maintain a 3% growth rate, a goal of the Trump administration." Source: Eric Morath, "U.S. Worker Productivity Advances at Best Rate since 2010," Wall Street Journal, May 2, 2019. a. What economic variable was the Trump administration hoping would grow at a rate of 3 percent per year? b. What is the connection between productivity growth and growth in the variable you identified in part (a)? Productivity refers to ____________, and increases in productivity are a key determinant of this variable's growth rate.
Real GDP he quantity of goods and services that can be produced per worker or per hour of work
In calculating GDP, which levels of government spending are included in government purchases?
Spending by federal, state, and local governments
Which of these will ensure that an economy experiences sustained economic growth?
Technological change
In measuring changes in the standard of living of a country, economists rely heavily on comparisons over time of real GDP per capita because:
despite its well-known flaws, it is the best means we have of comparing the performance of an economy over time
As the value of a country's real GDP increases, the country is likely to:
devote more resources to pollution reduction
The best measure of the income households actually have available to spend is
disposable personal income
Purchases of which types of goods are business cycles most likely to affect?
durable goods
Which of these government policies can help economic growth
ensuring political stability and relatively little corruption
A period of real economic growth, where production and employment are both moving higher is known as:
expansion
The economic growth model predicts that poor countries will grow __________ than richer countries.
faster
Which of these determines the supply of loanable funds?
The willingness of households and governments to save
In the 1961 edition of his best-selling introductory economics textbook, the late Nobel laureate economist PaulSamuelson, noted that Soviet GDP might become larger than U.S. GDP by 1984. Source: Paul A. Samuelson, Economics, New York: McGraw-Hill, 1961, Figure 37.1, as reproduced in David M. Levy and Sandra J. Peart, "Soviet Growth and American Textbooks: An Endogenous Past," Journal of Economic Behavior and Organization, Vol. 78, No. 1-2, April 2011, p. 115. In 1961, why might a leading economist have expected the Soviet economy to eventually have become larger than the U.S. economy? Briefly explain why the Soviet economy failed to overtake the U.S. economy.
There were rapid increases in capital per hour worked, which led to rapid increases in real GDP per hour worked. The Soviet Union experienced diminishing returns to capital and a slower rate of technological advance.
Why does inflation make nominal GDP... a poor measure of the increase in total production from one year to the next? How does real GDP... deal with the problem inflation causes with nominal GDP?
When nominal GDP increases from year to year, the increase is due partly to changes in prices and partly to changes in quantities. All of the above
Which equation represents the relationship between GDP and the four major expenditure components?
Y = C + I + G + NX
Would the services of a real estate agent who helped sell (or helped buy) the house be included in GDP for 2021?
Yes. GDP for 2021 includes the market value of final goods and services. This includes real estate services.
What advice for finding a job would you give someone who lost his or her job because of machine learning? According to the BLS, in what category of unemployment would that person belong? If someone lost his or her job because of machine learning, that person would be considered
You should tell the worker that he or she needs to learn new skills or move to another city to find a job. structurally unemployed
What is a "tax perk"?
a "tax perk" is a decrease in a firm's tax obligation
Which of these is a financial intermediary?
a bank
Suppose you are available for work but have not looked for a job for at least the last four weeks because you believe that no jobs are available. You would then be counted as __________.
a discouraged worker
Which of the following goods or services would be excluded from personal consumption expenditures in the Bureau of Economic Analysis (BEA) statistics?
a new house
Which of these factors will cause the quantity of goods and services that can be produced by one worker, or in one hour of work, to increase?
a technological change
Which of these factors inhibit technological progress and growth?
closed economies
Which is the largest component of GDP?
consumption
How does the Bureau of Economic Analysis of the U.S. Department of Commerce measure GDP?
By adding the value in dollar terms of all the final goods and services produced domestically
Which of these do we subtract from GDP to obtain national income?
Depreciation
An article in the Wall Street Journal referred to "gross domestic product—the value of all goods and services produced in the U.S." Source: Harriet Tory, "U.S. Economy Grew at 3.2% Rate in First," Wall Street Journal, April 26, 2019. Briefly explain whether you agree with this definition of GDP.
Disagree, because GDP measures the value of all final goods and services produced in an economy, not all the goods and services produced
Suppose that the economy enters into a recession and that, as a result, Rusty Z. Wrench loses his job as a delivery truck mechanic and remains unemployed. When the economy recovers, Rusty's previous employer rehires him. What is the best classification for his time as an unemployed truck mechanic?
cyclically unemployed
The average German worker worked more than 400 fewer hours per year and earned nearly $13,000 less than did the average worker in the United States. Can we conclude anything about the well-being of the average German worker versus the well-being of the average worker in the United States from these data? What other measures would you like to see in evaluating the well-being of workers in these two countries? Can we conclude anything about the well-being of the average German worker versus the well-being of the average worker in the United States from these data? What measures besides average number of hours worked and real per capita GDP would you like to have to evaluate the well-being of workers in OECD countries?
No, because although the German worker earned less per year, they also worked less per year. Indicators of pollution, crime and other social problems, and the distribution of income.
Some economists argue that the apparent slowdown in productivity growth in the United States in recent years is a measurement problem resulting from the failure of GDP to capture the effects of many recent innovations, such as cloud computing. James Manyika, head of technology at McKinsey & Company, argues that for many of theseinnovations, "we have all these benefits but we're not paying for them." Source: Timothy Aeppel, "Silicon Valley Doesn't Believe U.S. Productivity Is Down," Wall Street Journal, July16, 2015. Before the arrival of the Internet, people looking for facts, such as the population of France or the salary of the president of the United States, had to go to the library to look them up. Now people can find that information in a few seconds with a Google search. Are the benefits to you of being able to do a Google search included in GDP? It has been argued that the slowdown in U.S. productivity growth in recent years is just a measurement problem. Is your answer above consistent with that argument?
No, because the benefits are diffused throughout the economy. Yes, because the benefits are difficult to measure.
Suppose a house is built and sold in the year 2010. If the house is resold in the year 2021, is the value of the house included in Gross Domestic ProductLOADING... (GDP) for 2021?
No. GDP for 2021 includes only production that occurs during 2021
The role of technological progress in determining economic growth can be described by which statement?
Per capita output will rise when we discover new and more effective uses of capital and labor.
An article by Gary Burtless of the Brookings Institution noted, "From the perspective of workers, the U.S. unemployment insurance (UI) system is one of the least generous in the industrialized world. . . . The distinctive feature of the U.S. system is that benefits do not last very long." Source: Gary Burtless, "When the Next Recession Hits, Will Unemployment Benefits Be Generous Enough?" brookings.edu, November 28, 2018. a. What are the costs and benefits to the U.S. economy of paying unemployment benefits for only a few months compared with paying benefits for a longer period, as Canada and countries in Western Europe do? Are the costs and benefits you discussed in part (a) different during an economic expansion than during an economic recession? Briefly explain
The benefit is that it increases the incentive for workers to find a job more quickly; however, workers may be forced to take jobs for which their skills are not well suited Yes, if unemployment insurance payments are available for only a short time during a recession, workers are likely to suffer large drops in income and the economy would suffer the results of the decrease in consumption spending.
The financial system—either financial markets or financial intermediaries—provides savers and borrowers with all of the following except:
The financial system provides security to savers by warranting that their funds are fully insured against loss.
We often use real GDP per capitaLOADING... as a measure of a country's well-being. Review the definition of real GDP per capita before answering the following question. Today, the typical American works fewer than 40 hours per week. In 1890, the typical American worked 60 hours per week. Would the difference between the real GDP per capita in 1890 and the real GDP per capita today understate or overstate the difference in the population's economic well-being?
The increase in real GDP per capita between 1890 and today understates well-being because the value of leisure is not included in GDP.
An article on the brookings.edu website quotes Akinwumi Adesina, the president of the African Development Bank, as asserting that "Africa is not going to be developed by aid. It will be developed by investment." Source: Landry Signé and Witney Schneidman, "Placing Investment at the Center of Africa's Development Strategy," brookings.edu, December 3, 2018. a. What type of aid was Adesina referring to? b. What type of investment was he referring to? c. Why might he believe that investment would be more important to the development of African countries than would aid?
a. Cash transfers or low-interest loans from foreign countries. b. Foreign direct and foreign portfolio investment. c.It would give Africa access to technology and funds that otherwise would not be available, which is a key factor to economic growth.
The producer price index tracks the prices firms receive for goods and services at:
all stages of production
If a firm increases its use of capital while holding constant the number of workers employed, the firm is said to experience:
an increase in the physical capital
What does Levy mean by "contract enforcement"?
binding, and individuals and businesses that do not fulfill their end of the bargain will face repercussions.
An alternating period of economic contraction and economic expansion measured over time with real GDP is known as the:
business cycle
Long-run growth in GDP is determined by
capital, labor productivity, and technology
The prediction that the per capita GDP of poor nations will eventually grow at a more rapid pace than the per capita GDP in rich nations is known as:
catch-up
In an interview with the Wall Street Journal, Prime Minister Narendra Modi of India stated that: "In two years, we have done a lot to position India to thrive in the changing world." He mentions that under his administration restrictions on foreign investment into India have been loosened. Source: Raymond Zhong, "India's Economic Growth Picks Up Pace, Accelerating to 7.6%," Wall Street Journal, May 31, 2016. All of the following are reasons that would explain why loosening restrictions on foreign investment help position India to thrive except
if restrictions on foreign investment were loosened, it would decrease the need for Indian firms to save and invest.
If the inflation rate is anticipated, _______________________
inflation may not be a big problem
In discussing the labor market during the recovery from the 2007-2009 recession, Federal Reserve Chair Janet Yellen noted that "the employment-to-population ratio has increased far less over the past several years than the unemployment rate alone would indicate, based on past experience." Source: Janet L. Yellen, "Labor Market Dynamics and Monetary Policy," Speech at the Federal Reserve Bank of Kansas City Economic Symposium, JacksonHole, Wyoming, August 22, 2014. During an economic expansion, we would normally expect the employment-population ratio to increase as the unemployment rate falls because
more people are likely to be employed the recovery was sluggish and employment did not expand as rapidly.
In an economy with rising prices, compared to the base year,
nominal GDP is larger than real GDP in years after the base year
