ECON 202 FINAL
In January 2013, Tim's Gyms, Inc. owned machines valued at $1 million. During the year, the market value of the equipment fell by 30 percent. During 2013, Tim spent $200,000 on new machines. During 2013, Tim's gross investment totalled
$200,000.
The commercial banks on Sunny Island have checking deposits of $4 million, reserves of $600,000, and loans of $2.4 million. The desired reserve ratio is 10 percent. The banks have ________ of desired reserves and ________ of excess reserves.
$400,000; $200,000
If the CPI was 122.3 at the end of last year and 124.5 at the end of this year, the inflation rate over these two years was
1.8 percent.
Assume that the total labor force is 100 individuals with 10 unemployed. The unemployment rate is ________. Now assume that 10 people drop out of the labor force and that 10 remain unemployed. The new unemployment rate is ________.
10 percent; 11 percent
If the basket of goods and services used to calculate the CPI cost $200 in the reference base period and $450 in a later year, the CPI for the latter year equals
225.
Suppose the economy is experiencing cyclical unemployment of 4 percent, structural unemployment of 3 percent, and frictional unemployment of 2 percent. What is the natural unemployment rate?
5 percent.
The population of Tiny Town is 100 people and the labor force is made up of 75 people. If 5 of these people are unemployed, the unemployment rate is
5/75 * 100.
Which of the following explains why the demand for loanable funds is negatively related to the real interest rate? A) A lower real interest rate makes more investment projects profitable. B) Consumers are willing to spend less and hence save more at higher real interest rates. C) Interest rate flexibility in financial markets assures an equilibrium in which saving equals investment. D) All of the above are reasons why the demand for loanable funds is negatively related to the real interest rate.
A) A lower real interest rate makes more investment projects profitable.
Choose the best statement. A) GDP equals aggregate expenditure and equals aggregate income. B) An increase in government purchases increases aggregate expenditure but does not change GDP. C) An increase in compensation of employees increases aggregate income but does not change GDP. D) GDP always equals aggregate expenditure and sometimes equals aggregate income.
A) GDP equals aggregate expenditure and equals aggregate income.
Which of the following items are considered physical capital? I. shares of Ford stock traded on the New York Stock Exchange II. the Taco Bell store nearest you III. the rental cars owned by Hertz Rental-A-Car IV. the salaries paid to Intel executives
A) II and III.
Which of the following statements is true? A) Real GDP fluctuates around potential GDP. B) Potential GDP fluctuates around real GDP. C) Potential GDP is the same as the real GDP. D) When all of the economy's resources are fully employed, the value of production is called real GDP.
A) REAL GDP FLUCTUATES AROUND POTENTIAL GDP.
Which of the following statements is incorrect? A) The labor force is equal to the number of people employed plus the number of people unemployed. B) The working age population includes everyone over the age of 16. C) The unemployment rate is the number of persons who are unemployed divided by the labor force then times 100. D) The labor-force participation rate is the labor force divided by the working-age population then times 100.
A) The labor force is equal to the number of people employed plus the number of people unemployed.
Which of the following best describes the chain of events in the money creation process? A) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves. B) Currency is drained from the quantity of money into the banking system, where it is lent out. The loans are spent, increasing the currency drain and also the quantity of money. C) Desired reserves increase, encouraging banks to seek new deposits. When the new depositors come in, desired reserves decrease and the quantity of money increases. D) Low interest rates discourage people from holding currency. When they deposit the currency, interest rates rise, increasing the quantity of money.
A) The monetary base increases. Banks acquire excess reserves which they loan out, increasing deposits and also the quantity of money. The new deposits then create additional excess reserves.
Suppose that you took out a $1000 loan in January and had to pay $75 in annual interest. During the year, inflation was 6 percent. Which of the following statements is correct? A) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent. B) The nominal interest rate is 7.5 percent and the real interest rate is 13.5 percent. C) The real interest rate is 7.5 percent and the nominal interest rate is 1.5 percent. D) The real interest rate is 6 percent and the nominal interest rate is 7.5 percent.
A) The nominal interest rate is 7.5 percent and the real interest rate is 1.5 percent.
The best example of a frictionally unemployed individual is A) Charles who has lost his job as an autoworker because of increased imports and can't find a good job that utilizes his skills. B) Mary who quit her job to find work closer to her home. C) Sam who lost his job as a real estate salesperson when the housing market went soft because of a recession. D) Sandy who has few skills and is no longer looking for work.
B) Mary who quit her job to find work closer to her home.
Let C represent consumption expenditure, S saving, I gross private domestic investment, G government expenditure on goods and services, and X - M net exports of goods and services. Then GDP equals
C + I + G + X - M.
Which of the following is FALSE about saving? A) Saving adds to wealth. B) Income left after paying taxes can either be consumed or saved. C) Saving equals wealth minus consumption expenditures. D) Saving is the source of funds used to finance investment.
C) Saving equals wealth minus consumption expenditures.
Which of the following purchases is included in personal consumption expenditures when determining gross domestic product? A) purchase of a previously-owned house because of the arrival of a new baby B) purchase of a new office building C) vacation expenses for a spring trip to Fort Lauderdale D) purchases of jeans to add to a store's inventory
C) vacation expenses for a spring trip to Fort Lauderdale
Full employment exists when A) there is only frictional and structural unemployment. B) the economy is at the natural unemployment rate. C) there is no cyclical unemployment. D) All of the above answers are correct.
D) All of the above answers are correct.
Inflation is a problem when A) it is unpredictable. B) it causes the value of money to vary unpredictably. C) it causes resources to be diverted from productive uses. D) All of the above answers are correct.
D) All of the above answers are correct.
Using the definition of unemployment, which of the following individuals would be unemployed? A) A full-time student quits school, enters the labor market for the first time, and searches for employment. B) Because of the increased level of automobile imports, an employee of General Motors is laid off but expects to be called back to work soon. C) Because of a reduction in the military budget, your next door neighbor loses her job in a plant where nuclear warheads are made and must look for a new job. D) All of these individuals are unemployed.
D) All of these individuals are unemployed.
Which of the following is NOT a reason that real GDP is a poor measure of a nation's economic welfare? A) Real GDP omits measures of inequality and political freedom. B) Real GDP does not take into account the value of people's leisure time. C) Real GDP does not include the underground economy. D) Real GDP overvalues household production.
D) Real GDP overvalues household production.
Which of the following is NOT considered to be in the labor force? A) a student who works part-time B) a person who is not working but who has tried to find a job in the past week C) a person who is waiting to start a new job in the next 30 days D) a person who is not working and who has not tried to find a job
D) a person who is not working and who has not tried to find a job
The U.S. personal savings rate for the first quarter of 2012 dropped to its lowest level since the start of the recession. Americans stashed away 3.6 percent of personal income in the first quarter, down from 4.2 percent in the fourth quarter of 2011 and a near-term peak of 6.2 percent in the second quarter of 2009. Which of the following could explain this drop in savings? A) a decrease in wealth from a fall in stock prices B) a rise in the real interest rate C) an increase in disposable income as the job market recovers D) a rise in consumer confidence that their incomes will be higher in the future
D) a rise in consumer confidence that their incomes will be higher in the future
Which of the following is a final good? A) the memory chips in your new smartphone B) a share of IBM stock C) flour purchased at the store to bake cookies at home D) flour used by the bakery to bake cookies
D) flour purchased at the store to bake cookies.
Which of the following expenditures associated with the production of a new high- performance SUV will be directly included in GDP? A) the sale of bonds to finance the construction of the assembly plant B) the purchase of used welding robots to assemble to vehicles C) the purchase of new tires to be installed on the new vehicles D) the purchase of new machine tools to manufacture the engines
D) the purchase of new machine tools to manufacture the engines
Sarah and Diane are both billing clerks for the local trucking company earning $17,000 per year. Sarah is attending college, plans to graduate in one year and earn $55,000 as an economist. Diane is not in college or undergoing any specialized training and will have the same job next year. According to economic theory, which of the two individuals would tend to have a higher current savings rate?
Diane
An open market operation occurs when the ________ buys or sells securities ________.
Federal Reserve System; in the open market
________ gross domestic product is the value of ________ linked back to the prices of a single year.
Real; total production
Suppose the CPI last year is 121 and the CPI this year is 137. The correct method to calculate the inflation rate is
[(137 - 121)/121] × 100 = 13.2.
An increase in currency held outside the banks is ________.
a currency drain
According to the BEA, in the second quarter of 2012 nominal GDP rose by 1.7 percent and real GDP rose by 3.3 percent. The difference between the change in nominal GDP and the change in real GDP could be explained by
a decrease in prices of final goods and services produced.
The initial impact of the Fed's open market sale of government securities to banks is
a decrease in the quantity of money by some multiple of the dollar volume of the sale.
During the financial crisis in 2007 and 2008, financial institutions believed that default risks were higher. As a result, there was ________ in the supply of loanable funds and a ________ in the real interest rate.
a decrease; rise
An individual who has stopped looking for a job because he is convinced that he cannot find a job is referred to as
a discouraged worker.
A loaf of bread purchased by one of your instructors would be best described as
a final good.
The use of purchasing power parity prices
accounts for differences in the prices of the same goods in different countries when measuring real GDP.
If Nike, an American corporation, produces sneakers in Thailand this would
add to Thailand's GDP but not to U.S. GDP.
A ton of coal purchased by your local utility to burn to make electricity would be best described as
an intermediate good.
In 2000, you could buy a Cadillac DTS for $45,000. In 2011, the Cadillac DTS sold for $55,000. While both models include anti-lock brakes and air bags (along with other similar features), the 2011 model also includes satellite radio and new technology that provides improved gas mileage and safer driving. If the Cadillac DTS was included in the CPI basket, it would create
an upward bias in the CPI as a result of quality change bias.
Nominal GDP is the value of final good and services
at the prices of that year.
Nominal GDP is the value of final goods and services
at the prices of that year.
Real interest rates around the world tend to
be equal after adjusting for differences in risk because financial capital seeks the highest possible return.
In the short run, when the Fed increases the quantity of money
bond prices rise and the interest rate falls.
If the real interest rate is below the equilibrium real interest rate,
borrowers will be unable to borrow all of the funds they want to borrow and the real interest rate will rise.
The cost of inflation to society includes I. the opportunity costs of resources used by people to protect themselves against inflation. II. the diversion of productive resources to forecasting inflation.
both I and II
The consumer price index (CPI)
compares the cost in the current period to the cost in a reference base period of a basket of goods typically consumed in the base period.
The expenditure approach measures GDP by adding
consumption expenditure, gross private domestic investment, net exports of good and services, and government expenditure on goods and services.
In the circular flow diagram, aggregate expenditure includes
consumption expenditure, investment, government expenditures, and net exports
A decrease in exports of goods or services with no change in imports of goods or services
decreases GDP.
If the economy's capital stock decreases over time,
depreciation exceeds gross investment.
The difference between gross investment and net investment is
depreciation.
Real GDP is not a perfect indicator of economic welfare because ______.
economic welfare depends on many factors not measured or not measured accurately by real GDP
Gross domestic product can be calculated
either by valuing the nation's output of goods and services or by valuing the income generated in the production process.
Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond increases from $1,000 to $1,250, then the interest rate on the bond
falls from 10 percent to 8 percent.
When the economy is operating at full employment, the natural unemployment rate consists of only
frictional and structural unemployment.
This type of unemployment reflects the normal amount of unemployed workers who possess skills that will enable them to find another job.
frictional unemployment
Suppose a firm has an investment project which will cost $200,000 and result in $30,000 profit. The firm will not undertake the project if the interest rate is ________.
greater than 15 percent.
Members of the Federal Reserve System's Board of Governors
hold 14-year staggered terms.
In a circular flow of income
households demand goods and services that are supplied by firms, while supplying factors that are demanded by firms.
Including marginally attached workers in the calculation of the unemployment rate would
increase the reported rate.
When price levels rise, the quantity of nominal money demanded will ________ and the quantity of real money demanded will ________.
increase; stay the same
If Frito Lay, an American snack company, opens a new manufacturing facility in Mexico and produces snacks which are distributed in South America, then Mexico's GDP ________ and U.S. GDP ________.
increases; does not change
A small country is a net foreign borrower and its domestic demand for loanable funds increases. Consequently, the equilibrium quantity of loanable funds used in the country ________ and the country's foreign borrowing ________.
increases; increases
If the government begins to run a larger budget deficits, then assuming there is no Ricardo-Barro effect, the demand for loanable funds ________ and the real interest rate ________.
increases; rises
When less labor is unemployed than the amount at the natural unemployment rate, then real GDP ________ potential GDP.
is greater than
As currently calculated, the CPI tends to overstate the true inflation rate because
it fails to correctly measure quality changes for some products.
Suppose the working age population in Tiny Town is 100 people. If 25 of these people are NOT in the labor force, the _____ equals _____.
labor force; 75
Due to the recession in 2008, firms decreased their profit expectations. As a result, there was a ________ shift in the ________ loanable funds curve.
leftward; demand for
If the real interest rate is above the equilibrium real interest rate,
lenders will be unable to find borrowers willing to borrow all of the available funds and the real interest rate will fall.
Gross domestic product is the total _____ produced within a country in a given time period.
market value of all final goods and services
The most direct way in which money replaces barter is through its use as a
medium of exchange.
Controlling the quantity of money and interest rates to influence aggregate economic activity is called
monetary policy.
The opportunity cost of holding money is the
nominal interest rate on assets other than money.
Because pollution reduces economic welfare, on this count real GDP as measured
overstates economic welfare.
When the nominal interest rate rises, the quantity of money demanded decreases because
people shift funds from money holdings to interest-bearing assets.
The term capital, as used in macroeconomics, refers to
physical capital.
In the above figure, a decrease in the real interest rate will result in a movement from point E to
point G.
The maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation is called
potential GDP.
In August 2012, the CPI inflation rate was 0.5 percent while the core CPI inflation rate was 0.1 percent. The difference between these two measurements of inflation indicates
prices for food and fuel were increasing more rapidly than prices for other goods.
U.S. investment is financed from
private saving, government budget surpluses, and borrowing from the rest of the world.
In the post-World War II period, considerable growth in total production took place in the United States. But at the same time, businesses were dumping their waste into the Great Lakes with minimal cost to themselves, significantly polluting the bodies of water as a result. This occurrence is an example where
real GDP gives an overly positive view of economic welfare.
According to the BEA, in the second quarter of 2011 nominal GDP was $15 trillion and in the second quarter of 2012 nominal GDP was $15.6 trillion. Based solely on this information, from the second quarter 2011 to the second quarter of 2012
real GDP may have increased, decreased, or stayed the same.
The ________ interest rate approximately equals the ________ interest rate minus ________.
real; nominal; the inflation rate
Suppose that a bond promises to pay its holder $100 a year forever. If the price of the bond decreases from $1,666 to $1,000, then the interest rate on the bond
rises from 6 percent to 10 percent.
During periods of inflation, which function of money is most severely affected?
store of value
Suppose the country of Tiny Town decided to open its borders to free trade. As a result, a number of its workers lost their jobs to international competition and can't find new jobs because their skills don't match what is required for job openings. The workers who lost their jobs and searched for new ones are best be considered part of
structural unemployment
When the automobile replaced horse-drawn carriages as the principal means of transportation, firms producing horse-drawn carriages went bankrupt and permanently laid off all their workers, thereby increasing
structural unemployment.
Substitution bias in the CPI refers to the fact that the CPI
takes no account of the substitution of goods by consumers when relative prices change.
Looking at inflation rates in the United States since the 1970s we see that
the 1970s experienced the highest inflation rates.
If U.S. exports are $2.7 billion and our imports are $2.2 billion,
the United States is "lending" to the rest of the world.
If U.S. exports are $2.2 billion and our imports are $2.7 billion,
the United States is borrowing from the rest of the world.
The velocity of circulation is
the average number of times a dollar bill is used in a year to buy the goods and services in GDP.
Assume the inflation rate falls from 4 percent to negative 2 percent. This means that
the economy is experiencing deflation.
Potential GDP is the
the maximum amount of production that can be produced while avoiding shortages of labor, capital, land, and entrepreneurship that would bring rising inflation.
The money multiplier determines how much
the monetary base will be expanded given a change in the quantity of money.
Assume the inflation rate falls from 4 percent to 2 percent. This means that
the price level is increasing more slowly.
Real GDP is
the value of total production of all the nation's farms, factories, shops and offices measured in the prices of a single year.
In August 2012, the official U-3 unemployment rate dropped from 8.3 percent to 8.1 percent. This change could have been caused by
unemployed workers giving up looking for a job.
If you lend a dollar for a year and at the end of the year the price level has risen by 10 percent,
you must have earned a nominal interest rate of 10 percent to maintain the purchasing power of your loan.
