Econ Exam 1

An economy recently reported nominal GDP of 3 trillion euro and a GDP deflator of 200. What was real GDP?

1.5 trillion euro, and real GDP is a better gauge of economic activity than nominal GDP

A U.S. firm produces nail guns in 2010 and adds them to its inventory. In 2011 the firm sells the nail guns to a U.S .construction company. In which year(s) does(do) these transactions raise investment?

2010 but not 2011

Which of the following statements best characterizes a basic difference between market economies and centrally-planned economics?

Centrally-planned markets: planners decide what goods and services are produced, how many, and who consumes them Market economies: allocates resources through firms and households as they interact

Which of the following statements best represents the principle represented by the adage, "There is no such thing as a free lunch?"

Dani must decide between going to Brazil and Florida for spring break

? refers to the size of of the economic pie; ? refers to how the pie is divided

Efficiency; equality

Laws that restrict the smoking of cigarettes in public places are examples of government intervention that is intended to reduce

Externalities

What is true about GDP?

GDP includes factory production, but not any harm that may be inflicted on the environment

Many things that society 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

What does not apply to a market economy?

Government policies are the primary forces that guide the decisions of firms and households

You lose your job and, as a result, you buy more frozen pizzas. For you, frozen pizzas are an

Inferior good

To which of the problems in the construction of the CPI is the invention of pocket-sized computers most relevant?

Introduction of goods

Consider a small economy in which consumers buy only two goods: pretzels and cookies. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that

Neither the number of pretzels bought by the typical consumer, nor the number of cookies bought by the typical consumer changes from year to year

Suppose that a decrease in the price of good X results in fewer units of good Y being demanded. This implies that X and Y are

Substitute goods

Samantha goes to the grocery store to make her monthly purchase of ginger ale. As she enters the soft drink section, she notices that the price of ginger ale has increased 15 percent, so she decides to buy some peppermint tea instead. To which problem in the construction of the CPI is this situation most relevant?

Substitution bias

Which is better, the CPI or GDP deflator?

The CPI is better than the GDP deflator at reflecting the goods and services bought by the consumers

Productivity is defined as the

The amount of goods and services produced from each unit of labor input

If a U.S. citizen buys a dress made in Nepal by a Nepalese firm, then

U.S. consumption increases, U.S. net exports decrease, and the U.S. GDP is unaffected

If a surplus exists in a market, then we know that the actual price is

above the equilibrium, and quantity supplied is greater than quantity demanded

In a simple circular-flow diagram, total income and total expenditure are

always equal because every transaction has a buyer and a seller

Most goods and services produced at home

and most goods and services produced illegally are excluded from GDP

Transfer payments

are payments that flow from government to households, are not made in exchange for currently produced goods or services, alter household income, but they do not reflect the economy's production

Two goods are substitutes when a decrease in the price of one good

decreases the demand for the other good

Economists use the word equality to describe a situation in which

each member of society has the same income

GDP includes the value of all

final goods and services produced within a country using primarily market prices to measure the value of goods and services

A dress manufacturer recently has come to expect higher prices for dresses in the near future. We would expect

no change in the dress manufacturer's certain supply; future supply will be affected

The adage, "There is no such thing as a free lunch," is used to illustrate the principle that

people face tradeoffs

While pollution regulations yield the benefit of a cleaner environment and the improved health that comes with it, the regulations come at the cost of reducing the incomes of the regulated firms' owners, workers, and customers. This statement illustrates the principle that

people face tradeoffs

A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which principle of economics does this illustrate?

people respond to incentives

An increase in quantity supplied

results in a movement upward and to the right along a fixed supply curve

Suppose there is an increase in the price of steel. We would expect the supply curve for steel beams to

shift leftward

Suppose roses are currently selling for $40 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a

surplus to exist and the market price to decrease

The inflation rate you are likely to hear on the nightly news is calculated from

the CPI

If the prices of Australian-made shoes imported into the United States increase, then as a result,

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

What is not true about consumer price index?

the consumer price index is used to measure the the quantity of goods and services that the economy is producing

What basket of goods and services is used to construct the CPI?

the goods and services are typically bought by consumers as determined by government surveys

What is a macroeconomist likely to study?

the percentage of the labor force that is out of work, and differences in average income from country to country

Adam Smith's "invisible hand" refers to

the process by which individuals acting in their own self-interest bring about a market outcome that benefits society as a whole

What is included in GDP?

the purchase of ink and paper supplies by a textbook company for the production of new textbooks

Market economies are distinguished from other types of economics largely on the basis of

the way in which resources are allocated

If an economy is producing efficiently, then

there is no way to produce more of one good without producing less of another good

Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because

when a good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living