Midterm 2

Government intervention in the economy is:

called fiscal policy if it involves changing government spending or taxing in order to offset the economic effects of short-run fluctuations in the larger economy.

Mary expects the inflation rate to be 5 percent, and she is willing to pay a real interest rate of 3 percent. Joe expects the inflation rate to be 5 percent, and he is willing to lend money if he receives a real interest rate of 3 percent. If the actual inflation rate is 6 percent and the loan contract specifies a nominal interest rate of 8 percent, then:

Mary is glad she borrowed the funds because her real interest rate has fallen.

_____ is the value of all final goods and services produced in the economy during a given year; it is calculated using the current prices from the year in which the output is produced.

Nominal GDP

If Jim loans Sam $1,000 at 5 percent interest and there is an unexpected inflation of 2 percent, then:

Sam benefits.

_____ costs arise from the way inflation makes money a less reliable unit of measurement.

Unit-of-account

Frictional unemployment is considered to be:

good, since that means people may be seeking jobs that match their job skills.

According to Keynesian economics, economic slumps can be mitigated by:

government intervention

Deflation encourages people to:

hold more cash.

The empirical evidence for the convergence hypothesis:

holds true for wealthy nations.

Increasing a country's natural resources should _____ output, and, according to the text, the impact of this factor should be considered a(n) _____ important source of productivity growth as compared to human capital.

increase; less

Shoe-leather costs are the:

increased cost of transactions due to inflation.

One reason that Japan enjoyed a rapid economic growth rate in the 1960s was because that nation spent a very large share of its GDP on:

investment.

The natural rate of unemployment is:

is a positive percentage.

The producer price index usually _____ to price changes compared to the consumer price index.

is faster to respond

Cyclical unemployment:

is the deviation from the natural rate in the actual rate of unemployment.

Firms pay an efficiency wage because:

it reduces the risk of losing the best workers.

If the economy grew at 3% this year and average prices increased _____, people would be better off this year than last year.

less than 3%

In 1820, real GDP per capita was:

lower in Japan than in Mexico.

Changing the quantity of money, hence the interest rate, hence overall spending in the economy, is use of _____ policy.

monetary

The changes in taxes and government spending designed to change the overall level of spending in an economy is called

monetary policy

In 2002, the steel industry argued that higher tariffs on steel were necessary to help fight the war on terrorism. This is an example of the _____ argument.

national security

Frictional unemployment is inevitable because:

new workers are constantly entering the job market, and jobs are constantly created and destroyed.

The _____ interest rate is the interest rate expressed in dollar terms.

nominal

A tariff imposed on U.S. imports into Japan tends to _____ U.S. producers and _____ Japanese producers.

penalize; benefit

Erewhon produces tractors and pizzas. This information is shown in the table. Based on the table, if 2013 is the base year, real GDP in Erewhon was:

the same in 2013 and 2015.

The natural rate of unemployment equals:

the sum of frictional and structural unemployment.

Diminishing returns to physical capital may disappear if:

the technical means of the production of goods and services improves.

Intermediate goods are not counted in GDP because:

to do so would result in double counting.

If a country imports more than it exports, it will have a(n):

trade deficit

An open economy:

trades goods and services with other countries.

Macroeconomics, unlike microeconomics:

tries to explain increases in economic living standards over time.

The Bureau of Labor Statistics' treatment of discouraged workers causes the unemployment rate to _____ the "true" level of unemployment.

understate

The consumer price index, the producer price index, and the GDP deflator: -are not correlated. -sometimes move closely together. -usually move closely together. -rarely move closely together.

usually move closely together.

Which of the following would NOT be included in this year's GDP? -the purchase of a new hybrid truck -the hiring of a new schoolteacher -the production of a television show -your purchase of your neighbor's house, which was built in 1994

your purchase of your neighbor's house, which was built in 1994

Sinclair's Bakery buys butter for $50, eggs for $25, sugar for $40, and flour for $30. The bakery uses these ingredients to produce 20 cakes, which they sell for $20 each. Sinclair's value added is:

$255

A small economy produces three items: wheat, flour, and bread. Farmer Zack produces wheat and sells it to the Big Gluten Company. The Big Gluten Company produces flour and sells it to the Fragrant Bread Corporation. This information is shown in the table. The value added by Farmer Zack is:

$40

Tanesha receives monthly wages of $1,500 and government transfers of $200 per month. She also pays income and sales tax of $170, and has consumption spending of $1,450. Tanesha's private savings is:

$80

A small economy only produces two goods: steak and potatoes. This information is shown in the table. Based on the table, the growth rate of nominal GDP between years 1 and 2 is _____ percent.

-29

The table represents data on the economy of Neverland. Based on this table, the rate of inflation using the GDP deflator as the price index between 2015 and 2014 was approximately _____ percent.

-5.45

Real GDP in the country of Mandevillia has grown at 4 percent per year for the last 30 years. The labor force has grown at 1 percent per year and the quantity of physical capital has grown at 5 percent per year. A 1 percent increase in average physical capital per worker (other things equal) raises productivity by 0.5 percent. Average education has not changed. How much has technological progress contributed to productivity growth in Mandevillia?

1 percent

There are 12,000 people living in Toyland. Of these 12,000 people, 1,000 are either too old to work or too young to work. Of the remaining individuals, 5,000 are employed with full-time jobs; 3,000 are employed part-time but wish to work full-time; 1,000 are underemployed but working full-time jobs; 1,000 are currently not working but are looking for work; and the remainder are discouraged workers. The unemployment rate in Toyland is _____, and the percentage of the population that are discouraged workers is _____.

10 and 8.3

Scenario: Growth Rates Suppose that real GDP per capita of the United States is $32,000 and its growth rate is 2% per year. Real GDP per capita of China is $4,000, and its annual growth rate is 7%. (Scenario: Growth Rates) Look at the scenario Growth Rates. How long will it take China's real GDP per capita to double?

10 years

A small economy only produces two goods: soda and pizza. This information is shown in the table. Based on the table, the growth rate of nominal GDP from 2010 to 2011 was _____ percent.

10%

Lilliput has a real GDP per capita of $4000, which is growing at 5 percent per year. Blefuscu has a real GDP per capita of $10,000, which is growing at 2 percent per year. Lilliput's real GDP per capita will double to $8,000 in about _____ years.

14

GDP in the country of Sargonopolis has grown at 4 percent per year for the last 30 years. The labor force has grown at 1 percent per year and the quantity of physical capital has grown at 5 percent per year. A 1 percent increase in average physical capital per worker (other things equal) raises productivity by 0.5 percent. Average education has not changed. How much has growing physical capital per worker contributed to productivity growth in Sargonopolis?

2 percent

Marian's income is $50,000. If prices double, Marian's real income is _____ dollars.

25,000

The table represents the cost of some fruits in Smithtown in 2013 and 2014. A market basket for constructing a price index consists of 200 oranges, 100 apples, and 100 bananas. Based on this market basket, the rate of inflation between 2013 and 2014 in this economy was _____ percent.

3

If the economy of a country doubles in size in 20 years, then its economy's annual growth rate is about _____ percent.

3.5

(Table: Employment Data) Look at the table Employment Data. If marginally attached workers are included in the labor force, the labor force is:

33 million.

Suppose a panel of economists predicts that a nation's real GDP per capita will have an average annual growth rate of 2%. According to the rule of 70, how many years will it take for this nation's real GDP per capita to double?

35

In the nation of Lanticore, real GDP per capita grows at 2 percent per year. For Lanticore's real GDP per capita to approximately double, it will take about:

35 years, because the Rule of 70 states that the number of years it takes for a variable to double is equal to 70 divided by the annual growth rate of the variable.

A small economy only produces two goods: steak and potatoes. This information is shown in the table. Based on the table, if year 2 is the base year, real GDP in year 2 is _____ dollars.

46,000

Jerry borrows $100 today and repays the lender $105 after 1 year. The annual interest rate on Jerry's loan is _____ percent.

5

The adult population of Inquanok is 100,000 people. Of these 100,000 people, 20,000 are not in the labor force. Of the remaining 80,000 people, 16,000 have given up searching for a job and are not actively seeking work, 4,000 are unemployed and actively seeking work, 14,000 work part-time, and the remainder are fully employed. The unemployment rate in Inquanok is _____ percent.

6.3

The adult population of Barataria is 100,000 people. Of these 100,000 people, 20,000 are not in the labor force. Of the remaining 80,000 people, 16,000 have given up searching for a job and are not actively seeking work, 4,000 are unemployed and actively seeking work, 14,000 work part-time, and the remainder are fully employed. There are _____ people employed in the Baratarian economy.

60,000

The adult population of Morelly's Land is 100,000 people. Of these 100,000 people, 20,000 are not in the labor force. Of the remaining 80,000 people, 16,000 have given up searching for a job and are not actively seeking work, 4,000 are unemployed and actively seeking work, 14,000 work part-time, and the remainder are fully employed. The labor force participation rate in Morelly's Land is _____ percent.

64

According to the Rule of 70, if real GDP per capita grows at 10 percent per year, then GDP will double in about _____ years.

7

A small economy only produces two goods: soda and pizza. This information is shown in the table. Based on the table, if 2010 is the base year, real GDP in 2011 was _____ dollars.

720

Suppose a lender expects a real interest rate of 6% and the inflation rate is expected to be 3%. In this case, the nominal interest rate equals:

9%.

Which is true regarding output per worker? Holding everything else constant, a decrease in physical capital per worker increases the level of output per worker. Holding everything else constant, an increase in human capital per worker reduces the level of output per worker. An aggregate production function indicates how output per worker depends on the level of physical capital per worker, human capital per worker, and the state of technology. Holding everything else constant, a decrease in the technical means of the production of goods and services increases the level of output per worker.

An aggregate production function indicates how output per worker depends on the level of physical capital per worker, human capital per worker, and the state of technology.

Which is true regarding efficiency wages?

An employer can encourage workers to work hard by paying an efficiency wage.

Which is true regarding inflation and interest rates? Most contracts that extend over a period of time are expressed in real terms so that borrowers and lenders can fully understand the consequences of their economic agreement. When the actual inflation rate equals the anticipated inflation rate, borrowers are better off. Anticipated inflation can inflict real costs on the economy. The nominal interest rate is equal to the real interest rate minus the inflation rate.

Anticipated inflation can inflict real costs on the economy.

In the United States, the national accounts are calculated by the:

Bureau of Economic Analysis.

Which federal agency calculates and reports the official unemployment rate?

Bureau of Labor Statistics

Which of the following is considered investment spending in macroeconomics? Ryan Jones buys GM bonds. Ryan Jones buys GM stock and bonds. Ryan Jones buys GM stock. GM builds a new plant.

GM builds a new plant.

Which of the following are sources of funds for investment spending? I. domestic savings II. foreign savings III. consumption

I and II

Which of the following is a paper claim that entitles the buyer to future income from the seller? I. a financial asset II. a physical asset III. a liability

I only

Marco expects the inflation rate to be 6 percent, and he is willing to pay a real interest rate of 3 percent. Jin expects the inflation rate to be 6 percent, and she is willing to lend money if she receives a real interest rate of 3 percent. If the actual inflation rate is 5 percent and the loan contract specifies a nominal interest rate of 9 percent, then:

Jin is glad she lent out funds because her real rate of interest has risen.

The official panel of experts in the United States that claims to determine when a recession begins and ends is the:

National Bureau of Economic Research.

_____ is real gross domestic product (GDP) divided by the population.

Real GDP per capita

_____ is spending used to create and implement new technologies.

Research and development

Which is a liability from a bank's perspective?

Sue's checking account deposit of $500 at the bank

An investment project for the Tribble Manufacturing Co. costs $3,000 now and will return $2,000 at the end of each of the next 2 years. If the annual interest rate is 10 percent:

Tribble Manufacturing Co. should invest in the project.

Which asset is MOST liquid?

a checking account balance of $1,000

Donna was laid off at the beginning of 2011. She looked for a job for three months but could not find anything suitable. She then decided to volunteer for a soup kitchen and stopped looking for a job. Donna is considered to be:

a discouraged worker.

If an economy is experiencing capital inflows, then:

a greater amount of investment will occur.

Which one of the following measures long-run economic growth? -a sustained increase in the production of goods and services -an increase in the labor force -an increase in the money supply -a rise in employment

a sustained increase in the production of goods and services

A country's investment spending during the current year is equal to $400 million, while its level of saving for the current year is $350 million. According to the text, this country will MOST likely run:

a trade deficit

Real GDP per capita in China in 2000 was _____ the U.S. real GDP per capita in 1900.

about the same as

Diversification in investment is achieved when:

an individual invests in several assets with independent or unrelated risks so that total risk from loss is reduced.

An illiquid asset:

cannot quickly be converted into cash with little loss of value.

The Medicinal Nirvana Company is considering developing a new drug from a recently discovered compound. The process will cost $15 million initially. The company expects it to generate revenue of $30 million immediately after a 6 year testing process. If the annual interest rate is 12 percent, and profit is the only motive, the:

company should develop the new drug.

The _____ measures the cost of the market basket of a typical urban U.S. family.

consumer price index

In an open economy, savings can come from all of the following EXCEPT:

consumption.

Real GDP for Macronesia was $300 million in 2014 and population was 200,000. If the population growth rate was 10 percent in 2015 while real GDP increased to $320 million, then real GDP per capita in Macronesia in 2015:

decreased.

A high level of _____ encourages people to hold more money.

deflation

During the Great Depression from 1929 through 1933, _____ was a big problem in the United States.

deflation

If businesses become more optimistic about future opportunities for investment spending, the

demand for loanable funds will increase, and interest rates will increase.

An economy increases the amount of physical capital per worker. At the same time, human capital per worker, the number of workers, and the level of the technical means of the production of goods and services is held constant. In this economy, output per worker will MOST likely:

eventually lead to output per worker increasing at a diminishing rate.

The United States does not have a comparative advantage in producing coffee, so it MOST likely will _____ coffee.

export

Money is channeled from savings to investment in the _____ market

financial

Unemployment that is due to the time workers spend in job search is _____ unemployment.

frictional

The present value of a future payment will be smaller if the time when it will be received is:

further (rather than nearer) in the future.

Inflation causes nominal interest rates to:

increase

There are 12,000 people living in Eastwick. Of these 12,000 people, 1,000 are either too old to work or too young to work. Of the remaining individuals, 5,000 are employed with full-time jobs; 3,000 are employed part-time, but wish to work full-time; 1,000 are underemployed, but working full-time jobs; 1,000 are currently not working, but are looking for work; and the remainder are discouraged workers. In Eastwick, for every $10,000 increase in the level of aggregate output, 100 people find jobs. If the king of Eastwick wanted the unemployment rate to equal 8 percent, the change in aggregate output would need to _____. [Assume that there are no changes in the number of young or old in the population or in the number of discouraged workers.]

increase by $20,000

An increase in inventories increase leads to a(n):

increase in investment spending, and an increase in GDP for the time period.

The effect of international trade on U.S. factor markets is to:

increase the wage of highly educated workers.

Bensalem is a small country; it had only 10 people and the GDP of its economy was $10,000 in 2014. Amazingly, the GDP in Bensalem in 2015 increased to $20,000 while the population increased by 50 percent. As a result, GDP per capita in Bensalem in 2015:

increased, because the percentage change in GDP was greater than the percentage change in population.

Since the 1960s, the U.S. price level has _____ and the inflation rate has _____.

increased; fluctuated

Productivity increases can be attributed to:

increases in physical capital or the amount of machinery and office space available to workers.

In the short run, inflation _____ during expansions in the business cycle and inflation _____ during contractions in the business cycle.

increases; decreases

_____ refers to a general increase in the overall level of prices.

inflation

According to the efficient markets hypothesis, if the value of a stock based on market fundamentals is greater than its current stock price, then the stock:

is undervalued

Long-run economic growth depends almost entirely on:

labor productivity growth.

Tinytown produces tractors and pizzas. Based on the table, if 2013 was the base year, real GDP in Tinytown in 2014 was:

less than nominal GDP in 2014.

Mary receives a loan from a bank. The loan is a(n) _____ to the bank.

liability to Mary and an asset

A _____ sells policies that guarantee a payment to a policyholder's beneficiaries when the policyholder dies.

life insurance company

The convergence hypothesis states that international differences in real GDP per capita tend to _____ over time.

narrow

Savings in an economy is equal to _____ capital inflow.

national savings plus

In a closed economy, all investment spending must come from:

national savings.

There is a _____ relationship between the amount of loanable funds demanded and the rate of interest.

negative

The difference in the present value of benefits and the present value of costs is the:

net present value.

Polly's Pharmaceuticals is developing a new drug which will cost $10 million. Polly expects revenues of $12 million from sales of the new drug. If the interest rate is 24 percent, and profit is the only motive, Polly should:

not develop the new drug, because the enterprise will be unprofitable.

Many economists agree that environmental damage from economic growth:

occurs but can be contained with market-based incentives and concerted government action.

A robot that can perform surgery is an example of:

physical capital.

Long-run economic growth requires:

political stability and some respect for property rights.

Among the public goods important for economic growth is (are):

political stability.

Income divided by the price level is _____ income.

real

The _____ interest rate is the nominal interest rate minus the rate of inflation.

real

Productivity is equal to:

real GDP divided by the number of workers.

The best available measure of the standard of living in a country is:

real GDP per capita.

The true cost of borrowing is the _____ rate.

real interest

The GDP deflator:

refers to the ratio of nominal to real GDP.

Real GDP for Xanadu is $200 million in 2014 and population was 100,000. If population increased to 105,000 in 2015 while real GDP increased by 5 percent, then real GDP per capita in Xanadu in 2015:

remained constant.

(Figure: The Market for Loanable Funds II) Look at the figure The Market for Loanable Funds II. An increase in savings by the private sector will shift the supply of loanable funds to the_____ and _____ the interest rate.

right; decrease

In 1798, the English economist Thomas Malthus predicted that:

rising population growth would cause productivity per capita to fall.

The source of money for investment is:

savings

Economic recessions and economic expansions are:

short-run in nature.

Which of the following do economists view as investment spending?

spending on physical capital

Shares in the ownership of companies are called _____, and borrowing by a company in the form of an IOU with interest is called _____.

stocks; bonds

According to the text, a binding minimum wage generally leads to

structural unemployment, because more people want to work than can find jobs at the minimum wage.

On a graph, if households and firms increase the level of private savings because they become pessimistic about the future, then the:

supply for loanable funds shifts to the right

According to the text, countries that experience rapid growth are those:

that increase their physical and human capital.

If the minimum wage is set above the market equilibrium wage rate, then:

the government has established a binding price floor with the minimum wage.

According to the text, the "new growth theory" recognizes:

the importance of innovators' ability to establish monopolies if there is to be an incentive for engaging in research and development.

Human capital consists of:

the knowledge, experience, and education of the work force.

According to the text, natural resources in the twenty-first century are less important in determining productivity than human or physical capital for:

the majority of countries in the twenty-first century.

If everyone has more cash, then in the long-run:

the overall level of prices will increase.

A common strategy to reduce the risk of a large financial loss is:

to diversify financial assets so that their risks of failure are unrelated.

A country's investment spending during the current year is equal to $400 million, while its level of saving for the current year is $350 million. According to the text, this country will MOST likely run:

trsde deficit

A person without a job who is actively seeking and available for work is considered:

unemployed.

An economy wants to increase its level of physical capital per worker by increasing the level of investment spending. This can be achieved:

when domestic residents spend less of their income on consumption spending.

If the economy of the United States grows at 5 percent per year, the size of the economy will quadruple in about _____ years.

28

The table represents the cost of a market basket of goods in the village of Roundtop for the years 2011, 2012, 2013, and 2014. If the base year is 2011, the inflation rate for 2013 was _____ percent.

8.3

"Macroeconomics is nothing but a simple aggregation of all the microeconomic parts." Do you agree or disagree with this statement?

Don't agree; there is a lot more to the study of macroeconomics than the sum of its microeconomic parts.

Below are four statements about microeconomics and macroeconomics. Which one is true? In macroeconomics, there is no role for government intervention in the economy. In microeconomics, the prices determined in economic models are aggregate price levels for the economy. Fiscal and monetary policy may be helpful in reducing short-term economic fluctuations in the economy caused by adverse economic events. Microeconomics studies business cycle fluctuations in the economy.

Fiscal and monetary policy may be helpful in reducing short-term economic fluctuations in the economy caused by adverse economic events.

The scale most often used to compare economic performance in other years is:

GDP

The equation that breaks GDP down by the four sources of aggregate spending is:

GDP = C + I + G + X - IM.

Which is true of the circular-flow diagram? -The flow of money into the household sector does not include the value of government transfers. -In the circular-flow diagram, the flows into each market or sector must equal the outflow coming from that market or sector. -The flow of money into the household sector includes the value of all the final goods and services that households produce. -The flow of money into the financial market does not include private savings.

In the circular-flow diagram, the flows into each market or sector must equal the outflow coming from that market or sector.

Which is true regarding unemployment? -Even small amounts of frictional unemployment are harmful to an economy. -Even small amounts of structural unemployment are harmful to an economy. -There is always frictional unemployment because there are always new workers entering the job market. -A well-functioning modern economy will have an unemployment rate equal to 0 percent.

There is always frictional unemployment because there are always new workers entering the job market.

The _____ is the government agency that collects data on unemployment, while the _____ actually calculates and releases the unemployment rate.

U.S. Census Bureau; Bureau of Labor Statistics

_____ refer(s) to the number of people who work part time because they cannot find full-time jobs.

Underemployment

Which is true regarding labor unions? -Workers acting collectively through a union find that overall levels of employment will increase in their labor market. -Strong labor unions and an effective minimum wage reduce the level of structural unemployment in an economy. -Strong labor unions and an effective minimum wage benefit all workers equally. -Workers acting collectively through a union have more power than if they act individually.

Workers acting collectively through a union have more power than if they act individually.

After the energy crisis in the 1970s and the reduction in the use of oil, the U.S. economy:

continued to grow.

The _____ hypothesis suggests that international differences in real GDP per capita tend to narrow over time.

convergence

The deviation of the unemployment rate from the natural rate of unemployment is called:

cyclical unemployment.

Unemployment is at its natural level if there is no:

cyclical unemployment.

According to the text, whether a country runs a trade deficit or a trade surplus depends on:

decisions about saving and investment spending in the country.

According to the text, if the government imposes tariffs on imports, it will MOST likely _____ productivity growth.

decrease

If gas prices are down 10 percent, housing prices are down 30 percent, and food prices are down by 20 percent, the economy is experiencing:

deflation

The aggregate production function exhibits _____ returns to physical capital when, holding the amount of human capital per worker and the state of technology fixed, each successive increase in the amount of physical capital per worker leads to a smaller increase in productivity.

diminishing

All of the following are part of the labor force EXCEPT _____ workers. discouraged employed unemployed part time

discouraged

All of the following statements are true regarding inflation EXCEPT that in: -periods of deflation, lenders benefit because the money they are repaid has more purchasing power than the money they lent out. -periods of unexpected deflation, borrowers benefit because the money they repay has less purchasing power than the money they borrowed. -1896, William Jennings Bryan ran for the U.S. presidency on a platform advocating inflation because he wanted to ease the debt of farmers. -countries with high and uncertain inflation, long-term loans are rare, which makes it difficult to make long-term investments.

periods of unexpected deflation, borrowers benefit because the money they repay has less purchasing power than the money they borrowed.

According to the text, the three factors that are necessary for increases in productivity are:

physical capital, human capital, and technological progress.

A(n) _____ compares the cost of purchasing a given market basket in a given year to the cost of purchasing the market basket in the base year.

price index

Households, with their income, can pay taxes, and:

purchase goods and services, and engage in private saving.

In the last three quarters of the year, a country's unemployment rate was recorded as 6.1 percent, 6.2 percent, and 6.5 percent. Based on this data, the economy is in the _____ phase of the business cycle.

recession

Since 1970, the economic living standard of the typical U.S. worker has:

remained about the same.

Income spent on exports:

represents income that has been "injected" into the economy.

Last month Brent lost his job at the auto parts factory because the factory relocated to Asia. Brent has been looking for similar jobs in his town but has found no openings. Brent is best classified as:

structurally unemployed.