econ test 1 practice questions

If the price of imported French wine rises, is the consumer price index or the GDP deflator affected more? Why?

CPI because it reflects prices of all goods and services bought

TheBLS announced that in January 2013, of all adult Americans, 143,322,000 were employed, 12,332,000 were unemployed, and 89,008,000 were not in the labor force.Use this information to calculate: a.the adult population. b.the labor force c.the labor-force participation rate d.the unemployment rate

a. 244,662,000 b. 155,654,000 c. 63.6% d. 7.9%

What components of GDP (if any) would each of the following transactions affect? Explain. a.A family buys a new refrigerator. b.Aunt Jane buys a new house. c.Ford sells a Mustang from its inventory. d.You buy a pizza. e.California repaves Highway 101. f.Your parents buy a bottle of French wine. g.Honda expands its factory in Marysville, Ohio

a. consumption b. investment c. investment d. consumption e. government spending f. consumption g. investment

The population of Ectenia is 100 people: 40 work full-time, 20 work half-time but would prefer to work full-time, 10 are looking for job, 10 would like to work but are so discouraged they have given up looking, 10 are not interested in working because they are full-time students, and 10 are retired. What is the number of unemployed? a.10 b.20 c.30 d.40

a.10

Which is the largest component of GDP? a.Consumption b.Investment c.Government purchases d.Next exports

a.Consumption

The consumer price index measures approximately the same economic phenomenon as a.Nominal GDP. b.Real GDP. c.The GDP deflator. d.The unemployment rate.

c.The GDP deflator.

How do unions affect the natural rate of unemployment?

unions raise the wage above the equilibrium level, the quantity of labor demanded declines while the quantity supplied of labor rises, so there is unemployment

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 transaction to GDP?

$3

Explain four ways in which a firm might increase its profits by raising the wages it pays.

(1) better paid workers are healthier and more productive; (2) worker turnover is reduced; (3) the firm can attract higher quality workers; and (4) worker effort is increased

List and describes four determinants of productivity.

1. human capital- knowledge and skills learned/ aquired 2. physical capital- equipment used in production 3. natural resources- inputs used in prodction that are found in nature 4. technological knowledge- society's understanding of the best way to produce

List the four components of GDP. Give an example of each.

1. investment- purchase of a new house 2. government purchases- salaries of government workers 3. net exports- Boeing's sale of an airplane to British Airways 4. consumption- households spend money on food or clothing

Describe the three problems that make the consumer price index an imperfect measure of the cost of living.

1. substitution bias- if the price of a good increases, quantity demanded decreases and consumers will substitute this good for something else, so quantity demanded of the substitute increases. 2. introduction of new goods- new goods = more variety, causing value of the dollar to increase which isn't shown in CPI 3. unmeasured quality change- when quality of a good decreases and price remains the same, value of the dollar decreases

Which do you think has a greater effect on the consumer price index: a 10 percent increase in the price of chicken or a 10 percent increase in the price of caviar? Why?

10 percent rise in chicken because that is what a typical consumer would buy

Below are some data from the land of milk and honey. Year $ milk # milk $Honey #Honey 2013 $1 100 quarts $2 50quarts 2014 $1 200 $2 100 2015 $2 200 $4 100 Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2013 as the base year.

2013- 200, 200, 100 2014-400, 400, 100 2015-800, 400, 200

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

300 - 150 = 150 150/150 = 1.0 1 x 100 = 100%

Which contributes more to GDP—the production of an economy car or the production of a luxury car? Why?

The production of a luxury car because it involves more money.

Explain why an economy's income must equal its expenditure. Give example.

They're the same, every dollar of spending by some buyer is a dollar of income for some seller. Ex. Karen pays Doug $100 to mow her lawn. Doug earns $100 and Karen spends $100, making the transaction even.

Many years ago, Peggy paid $500 to put together a record collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?

Zero. The effect of the GDP would have been at the time of the original sale, when the albums were marketed as new.

According to theory of efficiency wage, a.firms may find it profitable to pay above-equilibrium wage. b.an excess supply of labor puts downward pressure on wages. c.sectoral shifts are the main source of frictional unemployment. d.right-to-work laws reduce the bargaining power of unions.

a.firms may find it profitable to pay above-equilibrium wage.

Thomas Robert Malthus believed that population growth would a.put stress on the economy's ability to produce food, dooming humans to remain in poverty. b.spread the capital stock too thinly across the labor force, lowering each worker's productivity. c.promote technological progress, because there would be more scientists and inventors. d.eventually decline to sustainable levels, as birth control improved and people had smaller families.

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

Because consumers can sometimes substitute cheaper goods for those that have risen in price, a.the CPI overstates inflation. b.the CPI understates inflation. c.the GDP deflator overstates inflation. d.the GDP deflator understates inflation.

a.the CPI overstates inflation.

If 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 _________ hamburgers. a.5 b.15 c.30 d.60

b.15

Over the past century, real GDP per person in the United States has grown about ________ percent per year, which means it doubles about every ___________ years. a.2,14 b.2, 35 c.5, 14 d.5, 35

b.2, 35

According to the most recent data, among workers who are paid at an hourly rate, about _______ percent have jobs that pay at or below the minimum wage. a.2 b.5 c.15 d.40

b.5

If all quantities produced rise by 10 percent and all prices fall by 10 percent, which of the following occurs? a.Real GDP rises by 10 percent, while nominal GDP falls by 10 percent. b.Real GDP rises by 10 percent, while nominal GDP is unchanged. c.Real GDP is unchanged, while nominal GDP rises by 10 percent. d.Real GDP is unchanged, while nominal GDP falls by 10 percent

b.Real GDP rises by 10 percent, while nominal GDP is unchanged.

The largest component in the basket of goods and services used to compute the CPI is a.food and beverages. b.housing. c.medical care. d.apparel.

b.housing.

The main policy goal of the unemployment insurance system is to reduce the a.search effort of the unemployed. b.income uncertainty that workers face. c.role of unions in wage setting. d.amount of frictional unemployment.

b.income uncertainty that workers face.

Are minimum-wage laws a better explanation for structural unemployment among teenagers or among college graduates? Why?

better for teens because their education and skill level is lower

Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has 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? a.$40 b.$60 c.$80 d.$100

c.$80

The world's rich countries, such as Japan 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. a.3 b.6 c.12 d.36

c.12

Unionized workers are paid about _________ percent more than similar nonunion workers a.2 b.5 c.15 d.40

c.15

The population of Ectenia is 100 people: 40 work full-time, 20 work half-time but would prefer to work full-time, 10 are looking for job, 10 would like to work but are so discouraged they have given up looking, 10 are not interested in working because they are full-time students, and 10 are retired. Using the numbers in the preceding question, what is the size of Ectenia's labor force? a.50 b.60 c.70 d.80

c.70

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 GDP and GNP of the United States? a.GDP rises and GNP falls b.GNP rises and GDP falls. c.GDP shows a larger increase than GNP. d.GNP shows a larger increase than GDP.

c.GDP shows a larger increase than GNP.

An American buys a pair of shoes manufactured in Italy. How do the U.S. national income accounts treat the transaction? a.Net exports and GDP both rise. b.Net exports and GDP both fall. c.Net exports fall, while GDP is unchanged. d.Net exports are unchanged, while GDP rises

c.Net exports fall, while GDP is unchanged.

Because capital is subject to diminishing returns, higher saving and investment does not lead to higher a.income in the long run. b.income in the short run. c.growth in the long run. d.growth in the short run

c.growth in the long run.

If the consumer price index is 200 in year 1980 and 300 today, then $600 in 1980 has the same purchasing power as _______ today. a.$400 b.$500 c.$700 d.$900

d.$900

You deposit $2,000 in a savings account, and a year later you have $2,100. Meanwhile, the consumer price index rises from 200 to 204. In this case, the nominal interest rate is _____ percent, and the real interest rate is _______ percent. a.1, 5 b.3, 5 c.5, 1 d.5, 3

d.5, 3

Which of the following does not add to U.S. GDP? a.Air France buys a plane from Boeing, the U.S. aircraft manufacturer. b.General Motors builds a new auto factory in North Carolina. c.The city of New York pays a salary to a policemen. d.The federal government sends a Social Security check to your grandmother.

d.The federal government sends a Social Security check to your grandmother.

Most economist 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. a.concerned,rise b.concerned, fall c.not concerned, rise d.not concerned, fall

d.not concerned, fall

If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hikes will increase a.both CPI and the GDP deflator. b.neither the CPI nor the GDP deflator. c.the CPI but not the GDP deflator. d.the GDP deflator but not the CPI

d.the GDP deflator but not the CPI

What are the three categories into which the BLS divides everyone?How does BLS compute labor force, the unemployment rate, and the labor-force participation rate?

employed, unemployed, not in labor force 1. labor force = employed + unemployed 2. unemployment rate= 100X unemployed/labor force 3. p-rate= 100X labor force/ adult pop.

What claims do advocates of unions make to argue that unions are good for the economy?

hey are an antidote to the market power of the firms that hire workers and they are important for helping firms respond efficiently to workers' concerns

What does the level of a nation's GDP measure? What does the growth rate of GDP measure? Would you rather live in a nation with a high level of GDP and a low growth rate or in a nation with a low level of GDP and a high growth rate?

high level of GDP and a low growth rate

How does the rate of population growth influence the level of GDP per person?

higher rate of population growth= lower level of GDP per capita

In what way is a college degree a form of capital?

human

Why would removing a trade restriction, such as a tariff, lead to more rapid economic growth?

it works as technology and allows for more trade, increasing the standard of living

Why is it desirable for a country to have a large GDP? Give an example of something that would raise GDP and yet be undesirable.

larger GDP means the economic well-being is good & revenues/ production rates are high. ex- more people = less space to live and less resources

Why do economists use real GDP rather than nominal GDP to gauge economic well-being?

real- shows how economy's overall production of goods and services change over time (constant prices) nominal- only shows current prices

Explain the meaning of nominal interest rate and real interest rate. How are they related?

nominal- reported without a correction for effects of inflation real- interest rate corrected for effects of inflation

As the chapter states, GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being?

resales are not new production

Is unemployment typically short-term or long-term? Explain.

short term because they are able to find new jobs fairly quickly

Why is frictional unemployment inevitable? How might the government reduce the amount of frictional unemployment?

the economy is always changing, some firms shrink while others expand; govt. could help match unemployed with jobs that are open

The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded.

they do not bring in any money for the economy- double counting