ECON101 Exam 2: Problem Sets and Quizzes

Consumption of fixed capital (depreciation) can be determined by

subtracting net investment from gross investment

The unemployed are those people who

are not employed but are seeking work

Suppose that GDP was $200 billion in year 1 and that all other components of expenditures remained the same in year 2, except that business inventories increased by $10 billion. GDP in year 2 is

$210 billion

If real GDP per person was equal to $2,000 in 1900 and grew at a 1 percent annual rate, what would be the value of real GDP per person 100 years later?

$5,410

Which of the following is the correct way to calculate the unemployment rate?

(unemployed/labor force) x 100

Consumers in an economy buy only three general types of products, A, B, and C. Changes in the prices of these items over a period are shown below. Product Quantity Year 1 Year 2 A 10 $10 $8 B 15 $20 $22 C 8 $50 $55 Using year 1 as the base year, the country's Consumer Price Index in year 2 is:

106.25

A nation's average annual real GDP growth rate is 5%. Based on the "rule of 72," the approximate number of years that it would take for this nation's real GDP to double is

14.4 years

A nation's average annual real GDP growth rate is 3%. Based on the "rule of 72," the approximate number of years that it would take for this nation's real GDP to double is

24 years

Suppose Marcus eats nothing but burritos for dinner. He buys 30 burritos each month. During the last couple of weeks, Marcus noticed an increase in the price of burritos. The price of burritos rose from $5.50 per burrito last month to $6.60 per burrito this month. Assume that Marcus has a fixed income of $165 that he can spend on burritos. How many burritos can Marcus afford to buy at the new price of $6.60?

25 burritos

Yr Alta(rGDP) Zorn(rGDP) Alta(Pop) Zorn (Pop) 1 $2,000 $150,000 200 500 2 2,100 152,000 202 505 3 2,200 154,000 210 508 Between years 1 and 2, real GDP per capita grew by approximately __________ percent in Alta.

4

If the natural rate of unemployment is 4.5% and the actual unemployment rate is 6.5%, then Okun's law indicates that the GDP gap is

4%

The total population of an economy is 175 million, the labor force is 125 million, and the number of employed workers is 117 million. The unemployment rate for this economy is

6%

Over a 10-year period, the Consumer Price Index doubled. On the basis of this information and using the rule of 70, we can say that the average annual rate of inflation over this period was approximately

7%

Suppose that real GDP per capita in the United States is $49,000. If the long-term growth rate of real GDP per capita is 1.6% per year, how many years will it take for real GDP per capita to reach $98,000?

72/1.6 = 45 years

Suppose that real GDP per capita in Italy is $32,000. If real GDP per capita is growing at a rate of 2.5% per year, how many years will it take for real GDP per capita to reach $64,000?

72/2.5 = 28.8 years

The unemployment rate in an economy is 6%. The total population of the economy is 290 million, and the size of the civilian labor force is 150 million. The number of unemployed workers in this economy is

9 million

Which of the following expenditures is an example of a consumer durable good?

Arti buys a new refrigerator from Sears

Suppose there are two economies, Alpha and Beta, that have the same production possibilities frontiers. If Beta devotes more resources to produce capital goods than consumer goods as compared to Alpha, then in the future

Beta will experience greater economic growth than Alpha

Which of the following statements correctly explains exports versus net exports?

Exports are goods, services, or resources produced domestically and sold abroad, while net exports are equal to exports minus imports

Which of the following statements is correct? For a given real interest rate, the nominal interest must decrease if expected inflation increases. For a given nominal interest rate, the real interest will decrease if inflation decreases. For a given expected inflation rate, the nominal interest must increase if real interest decreases. For a given real interest rate, the nominal interest must increase if expected inflation increases.

For a given real interest rate, the nominal interest must increase if expected inflation increases

The table below shows GDP and real GDP in billions of dollars for the United States between 2009 and 2013. Real GDP was computed using 2009 as the base year. Using the information in the table, compute the GDP price index for each year. Year GDP Real GDP 2009 14,418.7 14,418.7 2010 14,964.4 14,783.8 2011 15,517.9 15,020.6 2012 16,163.2 15,369.2 2013 16,768.1 15,710.3

GDP Price Index 2009 - 100 2010 - 101.2 2011 - 103.3 2012 - 105.2 2013 - 106.7

Although GDP is likely the best measure of economic activity in the economy, one reason why GDP is considered to be an imperfect measure is because:

GDP does not include the purchase of illegal goods

The equation for net investment is written as:

Net Investment = Gross Investment - Depreciation

The following table shows the real GDP and population for the United States, Japan, Brazil, and Germany in 2010. Complete the table by calculating the real GDP per capita for each country United States $14,783,809 309 Japan 4,415,672 127 Brazil 1,797,588 201 Germany 3,111,392 82

United States - $47844 Japan - $34769 Brazil - $8943 Germany - $37944

The table below shows the expenditure components for the United States in 2013 in billions of dollars. Durable goods $1,249.3 Nondurable goods 2,601.9 Services 7,633.2 Gross investment 2,648.0 Exports 2,262.2 Imports 2,770.4 Federal government 1,231.5 State and local government 1,912.4 a. Calculate consumption expenditures in 2013 b. Calculate the amount of net exports in 2013 c. Calculate nominal GDP in 2013

a. $11484.4 billion b. -$508.2 billion c. $16768.1 billion

The following table shows national income by type of income for the hypothetical economy of Highlands in billions of dollars. Rents 300 Wages 800 Interest 150 Profits and losses 400 Indirect business taxes 70 Depreciation 180 Net foreign interest income 50 a. What is the value of national income for Highlands? b. Using the income approach, what is the value of nominal GDP for Highlands?

a. $1650 billion b. $1950 billion

The following table shows prices and quantities in the hypothetical economy of Lowlands for two different items in two different years. Assume these are the only two items produced in this economy. Year 1 Year 2 Apples $1.25 500 $1.50 560 Shirts 12.00 100 14.00 120 a. What is the value of nominal GDP for Lowlands in year 1? b. What is the value of nominal GDP for Lowlands in year 2? c. Assume year 1 is used as the base year for this economy. What is the value of real GDP in year 2? d. In Lowlands, the value of output in year 2 would be ________ if nominal GDP were used instead of real GDP.

a. $1825 b. $2520 c. $2140 d. overstated

The table below shows GDP and real GDP for the hypothetical economy of Tinseltown. Year GDP $ Real GDP $ 1 500 500 2 530 515 3 567 527 4 550 522 5 594 543 6 633 559 a. Using the information in the table, compute the GDP price index for each year and complete the GDP price index column. b. Using the GDP price index, prices in Tinseltown ______ between year 2 and year 3.

a. 1 - 100 2 - 102.9 3 - 107.6 4 - 105.4 5 - 109.4 6 - 113.2 b. increased

Suppose a nation has a labor force of 45.5 million workers and an unemployment rate of 6.15%. a. How many workers in this nation are unemployed? b. How many workers in this nation are employed?

a. 2.8 million b. 42.7 million

Assume you have the following information about an economy: # of People (millions) Population over age 16 249.7 Labor force 157.2 Not in the labor force 92.5 Employed 148.2 Unemployed 9.0 a. What is the unemployment rate in this economy? b. What is the labor force participation rate? c. Suppose that 1 million currently unemployed workers decide to no longer actively look for work. What is the unemployment rate in this economy now? d. What is the new labor force participation rate?

a. 5.73% b. 62.96% c. 5.12% d. 62.56%

Assume you have the following information about an economy: # of People (millions) Population over age 16 248.2 Labor force 156.0 Not in the labor force 92.2 Employed 146.4 Unemployed 9.6 a. What is the unemployment rate in this economy? b. What is the labor force participation rate? c. Assume that 1 million discouraged workers decide to start looking for work again, thereby increasing the number of officially unemployed workers by 1 million. What is the unemployment rate now? d. What is the new labor force participation rate?

a. 6.15% b. 62.85% c. 6.75% d. 63.26%

The table below shows real GDP per capita for the United States between the years 1950 - 2013 Year Real GDP per Capita (dollars) 1950 13,819 1975 24,601 2000 43,935 2013 49,179 a. What is the growth rate in the standard of living from 1950 to 1975? b. What is the growth rate in the standard of living from 1975 to 2000?

a. 78% b. 78.6%

Real GDP per capita is a

better measure of the physical environment than output

The table below shows the annual change in the average nominal wage and inflation rate since 2008. Annual Annual Yr Inflation Rate (%) Nom. Wage Growth (%) 2008 3.84 0.33 2009 -0.36 -1.20 2010 1.64 -0.74 2011 3.16 1.37 2012 2.07 2.68 2013 1.46 2.23 a. Compute the percentage change in real income for each year shown in the table. b. Of the years listed above, the paycheck of the average worker declined in _______ of the six years. c. Of the years listed above, the purchasing power of the average worker declined in _______ of the six years. d. The average real income of households can increase _______.

a. Annual Real Wage Growth (%) 2008 -3.51 2009 -0.84 2010 -2.38 2011 -1.79 2012 0.61 2013 0.77 b. 2 c. 4 d. whether nominal wage increases or decreases

Suppose an economy starts the year with $100 million in capital, and during the course of a year, it adds $20 million of gross investment. Economists estimate that the depreciation rate for this economy is 9% per year. a. Calculate depreciation and net investment for this economy. b. Now calculate the amount of next year's beginning capital stock for this economy.

a. Depreciation: $9 million Net investment: $11 million b. $111 million

The table below lists the prices from last year and the base year for a college related basket of goods. Goods Base Year ($) Last Year ($) Gasoline (per gallon) 1.90 2.50 Pizza (per pizza) 4.50 7.95 Beer (per 6-pack) 4.20 7.00 Textbook (per book) 100.00 233.00 a. What is the total cost for a basket of goods that includes 200 gallons of gas, 60 pizzas, 45 6-packs, and 3 textbooks? b. Using this basket of goods, compute the following CPI values: c. Assume that rather than buying textbooks for their courses last year, all students decided to buy online access cards at $100 per textbook. Compute the total cost for this basket of goods and the CPI.

a. In the base year: $1139 Last year: $1991 b. In the base year: 100 Last year: 174.8 c. Total cost of basket: $1592 CPI: 139.77

The table below lists the CPI values for the United States from different decades. Year CPI 1931 15.2 1932 13.7 1933 13.0 1946 19.5 1947 22.3 1948 24.1 1978 65.2 1979 72.6 1980 82.4 2001 177.1 2002 179.9 2003 184.0 a. Complete the table by computing the annual inflation rate. b. Using the table above, indicate the year the economy experienced: The highest annual inflation rate: The largest annual negative inflation (deflation) rate: The most stable price level (annual inflation rate closest to zero):

a. Inflation Rate (%) 1931 1932 -9.87 1933 -5.11 1946 1947 14.36 1948 8.07 1978 1979 11.35 1980 13.5 2001 2002 1.58 2003 2.28 b. The highest annual inflation rate: 1947 The largest annual negative inflation (deflation) rate: 1932 The most stable price level (annual inflation rate closest to zero): 2002

Determine whether each of the following examples would be included in Gross Domestic Product (GDP). a. When Judy went to the grocery store yesterday, she bought three pounds of potatoes. b. Ford Motor Company buys four tires to put on a new Ford Mustang. c. The U.S. Air Force purchases two new fighter jets from Boeing. d. When Joey had his birthday last week, his grandmother sent him a $100 bill that he could spend.

a. Judy's purchase of potatoes - would be included in GDP as a consumption expenditure b. The purchase of the tires - would not be included in GDP c. The purchase of the two fighter jets - would be included in GDP as a government purchase d. Joey's birthday gift of $100 - would not be included in GDP

Consider the following information about two nations: In nation A, the number of employed is 4,829,000 and the size of the labor force is 5,249,000. In nation B, the number of employed is 2,661,000 and the size of the labor force is 2,950,000. a. What is the unemployment rate in each nation? b. Nation A has ________ unemployed workers and ________ unemployment rate compared to nation B.

a. Nation A: 8% Nation B: 9.8% b. more; lower

Year CPI CPI(hundredths) 2011 224.94 2.249 2012 229.59 2.296 2013 232.96 2.330 2014 236.74 2.367 a. Using the information below, and assuming that you want to maintain your purchasing power from 2011, what nominal wage should you demand in each of the given years? b. Assume that your annual wage in 2014 was $85,000. This represents _______.

a. Nominal Wage ($) 2011 $80,080 2012 $81,753.53 2013 $82,964.16 2014 $84,281.62 b. This represents an increase in both nominal and real income ($85,000 is greater than $84,281.62, so is an increase in nominal income. $85,000/2.367 = $35,910.44; this is greater than $35,606.94, so the real income also increases)

The table below shows real GDP, population, and real GDP per capita for the hypothetical economy of Highlands. Yr R GDP Pop R GDP/Capita 1 $5,720 220 $26,000 2 6,496 224 29,000 3 7,392 231 32,000 a. Using the information in the table, calculate the growth rates in real GDP, population, and the standard of living (real GDP per capita) between year 1 and year 2. b. Now, using the information in the table, calculate the growth rates in real GDP, population, and the standard of living between year 2 and year 3. c. The standard of living in the economy of Highlands between year 1 and year 2 grew ________ the standard of living between year 2 and year 3.

a. Real GDP: 13.6% Population: 1.8% Standard of living: 11.5% b. Real GDP: 13.8% Population: 3.1% Standard of living: 10.3% c. faster than

The following table shows yearly real GDP data for France from 2006 to 2014, measured in billions of U.S. dollars. Year Real GDP (billions) 2006 2,136.6 2007 2,255.7 2008 2,582.4 2009 2,831.8 2010 2,619.7 2011 2,565.0 2012 2782.2 2013 2,611.2 2014 2,735.0 a. For each year, identify which stage of the business cycle the real GDP data represent for France. b. Using the table, what years represent a peak in France's business cycle? c. Using the table, what years represent a trough in France's business cycle?

a. Stage: 2006 2007 Expansion 2008 Expansion 2009 Expansion 2010 Recession 2011 Recession 2012 Expansion 2013 Recession 2014 Expansion b. 2009 and 2012 c. 2011 and 2013

For each of the following examples, indicate whether the transaction would be included in the gross investment component of GDP, and if so, indicate which category it would be included. a. When Leandro pays a general contractor to build a new house, it would b. The purchase of a new building by Whole Foods would c. When Sarah buys a new computer for her kids, it would

a. be included in gross investment as residential fixed investment b. be included in gross investment as business fixed investment c. not be included in gross investment

Identify the different stages of the business cycle. a. A time period when the economy is growing toward full employment is known as b. A time period characterized by full or near-full employment is known as c. A time period with two consecutive quarters of declining output is known as d. A time period when employment and real output are at their lowest levels is known as

a. expansion b. peak c. recession d. trough

In each of the following examples, identify whether the individual is experiencing cyclical unemployment, frictional unemployment, structural unemployment, or no unemployment. a. Eduardo has recently moved to a new city with his wife who was offered a great job there. He is trying to find a position in the same industry he worked in before relocating. b. Derek worked for a large telecommunications firm that went bankrupt last year due to a recent recession. He has since tried to find work with one of the firm's competitors, but good jobs are currently hard to come by. c. Drew lost his job at a car manufacturer last year. He spent 6 months applying for every job possible before giving up 2 months ago. He now spends his day playing Xbox. d. Paula has 20 years of experience in manufacturing. Her employer, and many other manufacturing firms, recently closed their U.S. plants. She would like to find a similar job but is unable to find anything that utilizes her skills. e. Katherine works part-time at a small retail store. She would like to work full-time, but her employer is currently unable to extend her hours. f. Tyrell just graduated from college with a business degree. His is currently looking for a job in banking in the major city he just moved to. g. Mike is a contractor who has been unable to find work, since most businesses are delaying or canceling their construction plans due to economic uncertainty in the coming year. h. Meg used to own and run her own bookstore. Her sales declined due to competition from online retailers. She has not been able to find any work related to her skills in the diminishing retail industry for books.

a. frictional unemployment b. cyclical unemployment c. not unemployed d. structural unemployment e. not unemployed f. frictional unemployment g. cyclical unemployment h. structural unemployment

a. Of the three types of unemployment described, which one usually involves the least amount of hardship to the unemployed and the lowest cost to the government and to society as a whole? b. For which of the three types of unemployment are job retraining programs and financial assistance for education most warranted?

a. frictional unemployment b. structural unemployment

In each of the following examples, identify whether the person is counted in the official labor force or not: a. Cynthia owns and operates her own retail store. b. Elder has recently moved to a retirement community in Florida where he enjoys his "golden years" as a retiree. c. Drew lost his job at a car manufacturer last year. He spent 6 months applying for every job possible before giving up 2 months ago. d. Katherine works part-time at a small retail store. She would like to work full-time, but her employer is unable to extend her hours. e. Latisha is an ambitious 15-year-old who spends her summer working as a lifeguard at a local pool. f. Ted Kaczynski is currently serving a prison sentence, but would like to use his skills in mathematics and chemistry again one day. g. Tyrell just graduated college with a business degree. He is currently looking for a job in banking in the major city he just moved to. h. John and his wife just had their second child. They decided that it was best for John to leave his job and care for their new child.

a. in the labour force b. not in the labour force c. not in the labour force d. in the labour force e. not in the labour force f. not in the labour force g. in the labour force h. not in the labour force

Suppose that inventories were $40 billion in 2012 and $50 billion in 2013. In 2013, national income accountants would

add $10 billion to other elements of investment in calculating total investment

GDP is the market value of

all final goods and services produced in an economy in a given year

The recurrent ups and downs in the level of economic activity extending over several years are referred to as

business cycles

GDP can be calculated by summing

consumption, investment, government purchases, and net exports

The cost of a higher living standard in the future is giving up

current consumption

The consumption of fixed capital in each year's production is called

depreciation

The principle that if the amount of labor and other inputs is held constant, then the greater the amount of capital in use, the less an additional unit of capital adds to production is called the principle of

diminishing returns to capital

In the expenditures approach of national income accounting, C, I, and G include expenditures for

domestically-produced, as well as imported, goods and services

In the expansion phase of a business cycle

employment and output increase

A trough in the business cycle occurs when

employment and output reach their lowest levels

The value of corporate stocks and bonds traded in a given year is

excluded from the calculation of GDP because it is not a component of gross investment

"Net foreign factor income" in the national income accounts refers to the difference between the

income Americans gain from supplying resources abroad and the income that foreigners earn by supplying resources in the U.S.

Usually an abundance of natural resources ______ labor productivity

increases

In year 1, the Consumer Price Index was 120 and the average nominal income was $30,000. In year 2, the Consumer Price Index was 125 and the average nominal level of income was $32,000. What happened to real income from year 1 to year 2?

it rose by $600

The U.S. produces and sells millions of different products. To aggregate them together into a single measure of domestic output, the quantity of each good produced is weighted by its

market price

When gross investment is positive, net investment

may be either positive or negative

The presence of discouraged workers

may cause the official unemployment rate to understate the true amount of unemployment

The major difference between nominal GDP and real GDP is:

nominal GDP measures the value of output in current-year prices, while real GDP measures output using constant prices

Environmental pollution is accounted for in

none of these (not GDP, PI, or DI)

Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result, the

official unemployment rate will remain unchanged

If an economy produces 100 pencils and 100 pens, and pencils sell for twice as much as pens,

pencils are weighted as twice as important in the economy compared to pens

When a firm builds a new factory, this is an example of an investment in

physical capital

In national income accounting, government purchases include

purchases by federal, state, and local governments

To increase future living standards by pursuing higher current rates of investment spending, an economy must

reduce current rates of consumption spending

If a nation's real GDP increases from 100 billion to 106 billion and its population jumps from 200 million to 212 million, its real GDP per capita will

remain constant

Economic growth can best be portrayed as a

rightward shift of the production possibilities frontier

Henry and his girlfriend ate dinner at the new Thai restaurant that recently opened in his neighborhood. This expenditure would be included in:

services

The inflation rate measures the percentage growth rate of

the CPI from one year to the next

Which of the following measures the changes in the prices of a "market basket" of some 300 goods and services purchased by typical urban consumers?

the Consumer Price Index

Which measure of inflation would include consumer goods and capital goods?

the GDP Price Index

Historical data show that during the recession of 1990 − 1991, the natural rate of unemployment was about 5.9 percent while the actual rate of unemployment was 7.0 percent. A decade later, during the 2001 recession, the natural rate of unemployment had fallen to 4.8 percent while actual unemployment was 6.0 percent. Which of the following statements is correct regarding these two short recessions?

the actual unemployment rate was higher during the recession of 1990-1991, but cyclical unemployment was higher in 2001

Net foreign factor income is

the difference between the income people in a country receive from resources owned in foreign countries and the income people in foreign countries receive from resources owned domestically

When economists talk about the "standard of living," they are generally referring to:

the level of overall well-being enjoyed by an economy

Which of the following is an example of an intermediate good?

the lumber produced by Boise Cascade and sold to a builder of old houses

Which of the following is not a component of gross investment?

the purchase of 100 shares of AT&T by a retired business executive (the purchase of a new drill press by the Ajax Manufacturing Company; construction of a suburban housing project; the piling up of inventories on a grocer's shelf - are all components of gross investment)

Nominal GDP is

the sum of all monetary transactions involving final goods and services that occur in the economy in a year

Human capital is

the talents, training, and education of workers

Which of the following statements about economic growth is accurate?

the world's sustained economic growth has only been occurring over the last 300 to 400 years

GDP tends to overstate economic well-being because it takes into account

total spending to deal with the adverse health effects of some products

If the negative GDP gap were equal to 4% of the potential GDP, Okun's law suggests that the actual unemployment rate would exceed the natural rate of unemployment by

two percentage points

The "rule of 72" is a formula for determining the approximate number of

years that it would take for a value (like real GDP) to double