Macro CH: 1, 2, 5, 6, 7

Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each which as a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby's store to be sold later. What is GDP here?

$80

You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the CPI rises from 200 to 204. In this case, the nominal interest rate is ____________ %, and the real interest rate is ____________ %

(2100-2000)/2000 = 5% (204-200)/200 = 2% 5-2 = 3% nominal interest: 5% real interest: 3%

If the CPI is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as

(300/200) X 600 = $900

What are the main two causes of market failure?

1. externalities - pollution 2. market power - in a town with only one well or only one cable television company

Governments may intervene in a market economy in order to

1. protect property rights 2. correct a market failure due to externalities 3. achieve a more equal distribution of income

The world's richest countries, such as the United States and Germany, have income per person that is about __________ times the income per person in the world's poor countries, such as Pakistan and India

10 times

Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been chosen as the base year. In 2002, the basket's cost was $75.00; in 2004, the basket's cost was $79.50; and in 2006, the basket's cost was $85.86. The value of the CPI was

100 in 2002 106 in 2004 114.48 in 2006

If the price of a hot dog is $2 and the price of a hamburger is $4, then 30 hot dogs contribute as much to GDP as

15 hamburgers

Over the past century, real GDP per person in the United States has grown about ___________ % per year, which means it doubles every ____________ years

2% every 35 years

If the CPI is 200 in year 1980 and 300 today, then $600 today has the same purchasing power as ___________ in 1980

400

Gross National Product =

GDP + NI from foreign countries

When the Japanese car maker Toyota expands one of its car factories in the United States, what is the likely impact of this event on the gross domestic product and gross national product of the United States?

GNP shows a larger increase than GDP

Explain how higher saving leads to a higher standard of living. What might deter a policymaker from trying to raise the state of saving?

Higher saving means fewer resources are devoted to consumption and more to producing capital goods. The rise in the capital stock leads to rising productivity and more rapid growth in GDP for a while. in the long run, the higher saving rate leads to a higher standard of living. A policymaker might be deterred from trying to raise the rate of saving because doing so requires that people reduce their consumption today and it can take a long time to get a higher standard of living

Which of the following is a positive, rather than a normative, statement?

Law X will reduce national income

An economic model is

a simplified representation of some aspect of the economy

Over a long period of time, the price of a candy bar rose from $0.20 to $1.20. Over the same period, the CPI rose from 150 to 300. Adjusted for overall inflation, how much did the price of candy bars change?

because the overall price level doubled, but the price of the candy bar rose sixfold, the real price (the price adjusted for inflation) of the candy bar tripled

A marginal change is one that

incrementally alters an existing plan

An economy produces hot dogs and hamburgers. If a discover of the remarkable health benefits of hot dogs were to change consumer's preferences, it would

move the economy along the production possibilities frontier

Which of the following is NOT necessary for long-run economic growth

natural resources

An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction?

net exports fall, while GDP is uncahnged

Most economists are ______________ that natural resources will eventually limit economic growth. As evidence, they note that the prices of most natural resources, adjusted for overall inflation, have tended to ___________ over time.

not concerned, fall

Thomas Robert Malthus believed that population growth would...

put stress on the economy's ability to produce food, dooming humans to remain in poverty

If all quantities produced rise by 10% and all prices fall by 10%, which of the following occurs?

real GDP rises by 10%, while nominal GDP is unchanged

Which of the following is a metaphor in our textbook for distinguishing between technological knowledge and human capital?

technological knowledge is the quality of society's textbook, whereas human capital is the amount of time that the population has devoted to reading them

Does a higher rate of saving lead to higher growth temporarily or indefinitely?

temporarily, not permanently. In the short run, increased saving leads to a larger capital stock and faster growth. But as growth continues, diminishing returns to capital mean growth slows down and eventually settles down to its initial rate, though this may take several decades

The introduction of new goods creates a problem when measuring the CPI because

the CPI is based on a fixed basket of goods and services and does not reflect increased value as a result of a larger variety of goods

Because consumers can sometimes substitute cheaper goods for those that have risen in price,

the CPI overstates inflation - because when computing the CPI the BLS uses a fixed basket which assumes the consumers are buying the same overpriced products

The CPI measures approximately the same economic phenomenon

the GDP deflator

If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase

the GDP deflator but not the CPI

Adam Smith's "invisible hand" refers to

the ability of free markets to reach desirable outcomes, despite the self interest of market participants

Why are economists less concerned about natural resources limiting growth?

the advancement of technological progresses

If a nation has high and persistent inflation, the most likely explanation is

the central bank creating excessive amounts of money

If the price of Italian shoes imported into the United States increases, then

the consumer price index will increase, but the GDP deflator will not increase

A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP

the contribution to GDP is $3, the market value of the break, which is the final good that is sold

Which of the following does NOT add to U.S. GDP?

the federal government sends a social security check to your grandmother

In the long run....

the higher saving rate leads to a higher level of productivity and income but not to higher growth in these variables

All of the following topics fall within the study of microeconomics EXCEPT...

the influence of the government budget deficit on economic growth

The more capital an economy has...

the less additional output the economy gets from an extra unit of capital ---> growth eventually slows down as capital, productivity, and income rise

Under which of the following conditions would you prefer to be the borrower?

the nominal rate of interest is 20% and the inflation rate is 25%

Your opportunity cost of going to a move is

the total cash expenditure needed to go to the movie plus the value of your time

Diminishing Returns

when workers already have a large quantity of capital to use in producing goods and services, giving them an additional unit of capital increases their productivity only slightly

Which is the largest component of GDP?

consumption

Country A has a population of 1,000, of whom 700 worked an average of 8 hours a day and had a productivity of 2.5. Country B has a population of 800, of whom 560 worked 8 hours a day and had productivity of 3.0. The country with the higher real GDP was

country A, and the country with higher real GDP per person was country B

According to your macroeconomics professor, the effect of rapid population growth on the living standards

depends on the country's stage of development

A point inside the production possibilities frontier is

feasible but not efficient

Because capital is subject to diminishing returns, higher saving and investment DO NOT lead to higher

growth in the long run

Because capital is subject to diminishing returns, higher saving and investment do not lead to higher

growth in the long run

The circular-flow diagram illustrates that, in markets for the factors of production,

households are sellers, and firms are buyers

The largest component in the basket of goods and services used to compute the CPI is:

housing

Economics is best defined as the study of

how society manages its scarce resources