EC 111 TEST #2

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 how much in 2002, 2004, and 2006?

- 100 in 2002 - 106 in 2004 - 114.48 in 2006

What plays a role in determining productivity?

- physical capital - natural resources - technological knowledge

Given that a country's real output has increased, in which of the following cases can we be sure that it's productivity also has increased?

- total number of hours worked stayed the same - total numbers of hours worked fell

GDP does not reflect...

- value of leisure - value of goods and services - produced at home - quality of the environment

Year Nominal GDP Real GDP 1929 103.6 977 1930 91.2 892.8 1931 76.5 834.9 1932 58.7 725.8 What are the growth rate of real GDP for 1930?

-8.62%. Real GDP is a better gauge of economic well-being than nominal GDP.

Suppose that over the last 25 years a country's nominal GDP grew to three times its former size. In the meantime, population grew by 40% and prices rose by 100%. What happened to real GDP per person?

It increased but less than doubled.

John is a stockbroker. He has had several job offers, but he has turned them down because he thinks he can find a firm that better matches his tastes and skills. Curtis has looked for work as an accountant for some time. While the demand for accountants doesn't appear to be falling, there seems to be more people applying than jobs available.

John is frictionally unemployed, and Curtis is structurally unemployed.

In 2010, the imaginary nation of Bovina had a population of 5,000 and real GDP of 500,000. In 2011 it had a population of 5,100 and real GDP of 520,200. During 2011 real GDP per person in Bovina grew by

2%, which is about the same as average U.S. growth over the last 100 years.

Suppose some country had an adult population of about 50 million, a labor-force participation rate of 60 percent, and an unemployment rate of 5 percent. How many people were employed?

28.5 million

Year Nominal GDP Real GDP 1929 103.6 977 1930 91.2 892.8 1931 76.5 834.9 1932 58.7 725.8 What are the GDP deflator and inflation rate for 1932?

8.09, -11.7

Year Nominal GDP Real GDP 1929 103.6 977 1930 91.2 892.8 1931 76.5 834.9 1932 58.7 725.8 What are the GDP deflator and inflation rate for 1931?

9.16, -10.3

An important difference between the GDP deflator and the CPI is that

GDP deflator reflects the prices of all final goods and services produced domestically, whereas the CPI reflects the prices of goods and services bought by consumers.

Many things that social values such as good health, high-quality education, enjoyable recreation opportunities, and desirable moral attributes of the population are not measured as part of GDP. It follows that

GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare.

The consumption component of GDP includes spending on

durable goods, nondurable goods, and services.

For an economy as a whole, income must equal expenditure because

every dollar of spending by some buyer is a dollar of income for some seller.

Other things equal, relatively poor countries tend to grow

faster than relatively rich countries; this is called the catch-up effect.

The steps involved in calculating the CPI and the inflation rate, in order, are as follows...

fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index, and compute the inflation rate

From time to time, the demand for workers has risen in one region of the United States and fallen in another. This illustrates

frictional unemployment created by sectoral shifts

Other things equal, the likelihood that a country will experience a relatively high level of income is greater if the country

has natural seaports

Goods that go into inventory and are not sold during the current period are

included in current period GDP as inventory inventory.

When the quality of a good improves while its price remains the same, the purchasing power of the dollar

increase, so the CPI overstates the change in the cost of living if the quality of change in not accounted for.

In the long run, a higher saving rate

increases the level of productivity

For a closed economy, the sum of private saving and public saving must equal ____________.

investment

What is not an explanation for the existence of structural employment?

job search

In countries that experience political instability, standards of living tend to be low because of

lack of respect for property rights.

If a reform of the tax laws encourages greater saving, the result would be

lower interest rates and greater investment.

If there is surplus of loanable funds, then

neither curve shifts, but the quantity of loanable funds supplied decreases and the quantity demanded increases as the interest rate falls to equilibrium.

By not taking into account the possibility of consumer substitution, the CPI...

overstates the cost of living

The inflation rate is the

percent change in the price level from one period to another.

You observe a closed economy that has a government deficit and positive investment. Private saving is ___________, public saving is ___________.

positive, negative

The level of real GDP is a good gauge of economic ___________ , and the growth of real GDP is a good gauge of economic ___________.

prosperity, progress

In the long run, an increase in the saving rate

raises levels of both productivity and income.

What is the CPI better at than the GDP deflator?

reflecting the goods and services bought by consumers

In the loanable funds model, an increase in an investment tax credit would create a

shortage at the former equilibrium interest rate. This shortage would lead to a rise in the interest rate.

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

the CPI will increase but the GDP deflator will not.

What does the level of GDP measure?

total real income

Some poor countries appear to be falling behind rather than catching up with rich countries. What could explain the failure of a poor country to catch up?

The poor country has poorly developed property rights.

A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result,

US investment and GDP increase but German GDP is unaffected.

What is the relationship between real and and nominal interest rates?

When the inflation rate is positive, the nominal interest rate is necessarily greater that the real interest rate.

If there are constant returns to scale, the production function can be written as

Y/L = A F (1, K/L, H/L, N/L)

Two of the economy's most important financial intermediaries are

banks and mutual funds

In the calculation of the of the CPI, coffee is given greater weight than tea if...

consumers buy more coffee than tea