economics: ch.16 exam

Assume that the marginal propensity to save is 0.1. What is the maximum amount that real GDP could change if net exports increase by $15 billion?

$150 billion

If the nominal GDP is $5 trillion in year 1, and the real GDP is $4.5 trillion, what is the GDP deflator?

$5 trillion / $4.5 trillion = around 1.111

If $100 of new private investment gets added to the economy, and the marginal propensity to consume is 0.80, by how much will aggregate demand increase?

$500

What is the formula needed to calculate real GDP growth rate?

(Real GDP in year 2 / Real GDP in year 1) -1

What is the real interest rate when the nominal interest rate on a bank checking account is 1%, and the rate of inflation is 2%?

-1%

A small island country had a seven percent increase in its money supply from the prior year and a three percent increase in real GDP. Calculate the change in the price level.

4%

How is a person's likelihood to save related to the simple spending multiplier?

A decrease in the marginal propensity to save will increase the multiplier.

What is the result of cost-push inflation?

A higher equilibrium price and lower economic output.

What happens when actual inflation is higher than expected inflation?

A redistribution of wealth takes place between savers to borrowers

Demand-Pull Inflation is illustrated by which of the following?

A rightward shift of the aggregate demand curve

The Substitution Bias is which of the following?

A weakness in the Consumer Price Index (CPI)

Last year, the Consumer Price Index (CPI) was 120, and Bob's household earned $80,000. Assuming this year's CPI is 130, what would Bob's household need to earn in order to have the same purchasing power as last year?

About $87,000

In year one, a worker's nominal wage is $25,000, and the CPI is 100. The following year, the worker's nominal wages stay the same, but the CPI is 105. In order to calculate the worker's real wage in year two, what needs to be done?

Adjust the nominal wage by inflation

In year one, nominal GDP is $5,000, while real GDP is $4,500. In year two, nominal GDP is $5,500, while real GDP is $4,800. What was the growth rate of real GDP between years one and two?

Around 7%

How do economists illustrate stagflation?

As a decrease in the short-run aggregate supply curve.

Why does the Substitution Bias occur?

Because consumers are willing to substitute a cheaper good for another good that is more expensive

Melissa has a choice between two jobs. The first is a job is in New York City with a salary of $90,000. The other job has a salary of $80,000 per year salary in Boise, Idaho. Let's assume that the CPI is 120 in New York, while the CPI is 100 in Boise. If Melissa wants to maximize her 'real wage', which job should she choose?

Boise, because the real wage is $5,000 higher than the real wage in New York.

What does the Consumer Price Index measure?

Changes in the price level of an economy

When aggregate demand increases faster than aggregate supply, prices go up. What is this an example of?

Demand-pull inflation

Which of the following statements is FALSE regarding inflation?

During the 1970s, it was extremely low.

An economist representing the U.S. government wants to prepare a calculation that presents a broad and comprehensive view of total inflation. What value is she MOST likely to use to attain her goal?

GDP deflator

Which of the following is considered the best measure of changes in prices by economists?

GDP deflator

Which of the following is a cause of Cost-Push Inflation?

Increases in the costs to produce

A retired woman lives entirely on Social Security income, while a farmer borrows money to buy a new tractor. How would inflation affect them?

Inflation helps the farmer but hurts the retiree

Last year, an assembly-line worker earned $10 per hour when the Consumer Price Index (CPI) was 100. This year, the same worker earned $12 per hour, but the CPI has increased to 125. What happened to the worker's real wage?

It decreased.

Why is the GDP deflator considered superior to the consumer price index?

It is not based on a fixed basket of goods.

Which of the following statements is FALSE regarding the Substitution Bias?

It leads to an understatement of inflation.

What is the benefit of using Real GDP?

It removes the effect of rising prices.

What is the value of using real GDP?

It removes the effects of rising prices.

Nominal GDP in year one was $16,000, while nominal GDP in year two was $19,320. Real GDP was $16,000 in year one and $15,500 in year two. What does this indicate about the economy?

It was in recession.

Which of the following is the correct formulation of the equation of exchange?

M x V = P x Y

How is nominal GDP calculated?

Multiplying price x quantity in the same year for every good and finding the total.

How is real GDP calculated?

Multiplying the quantity x the price in a base year.

A potential investor is seeking to analyze the current economy. She is interested in a measure of GDP represented in current dollars. What GDP value will she MOST likely utilize?

Nominal GDP

When economists want to measure current production of an economy at current prices, they use which of the following?

Nominal gross domestic product

Using the chart below, which statement is true regarding wages over the three year period?

Nominal wages rose, while real wages stayed the same.

The Consumer Price Index (CPI) is based on a fixed basket of goods that the average citizen buys. The Substitution Bias causes this index to do which of the following?

Overstate the level of inflation

If Mary's nominal income rises by 4%, while her real income fell by 2%, what happens to the level of prices?

Prices increase by 6%.

If nominal GDP increased by 5.1% and real GDP increased by 2.5% last year, which of the following is TRUE?

Prices went up during the year.

What occurs when the rate of unemployment goes up at the same time as inflation?

Stagflation

What happens if the rate of inflation as reported by the Consumer Price Index is 3%?

The actual rate of inflation may be lower because of the Substitution Effect.

Why might a national wheat plague cause cost-push inflation?

The lack of wheat will make common items more expensive.

It's payday and you are so excited that your hard work has been rewarded. On your way home from work, you stop at your favorite sandwich shop to get some food. As you pay the vendor in cash, you see him hand your money to an employee asking him to run out to a supplier to replenish inventory. What economic event has just taken place?

The multiplier effect

According to the equation of exchange, which of the following usually has the largest impact on inflation?

The rate in change of the money supply

What does the GDP deflator represent?

The ratio of the nominal GDP to the real GDP

Economic forecasters are challenged by an economy where rising prices are causing a devaluation in currency. Which item MOST likely is responsible for this condition?

Unanticipated inflation

The marginal propensity to save (MPS) would present a figure MOST often calculated when government officials are considering:

a tax cut.

Measuring the level of prices in the economy and comparing them to previous years yield an inflation measure known as the:

consumer price index.

Real GDP evaluates _____ production at _____ prices.

current; past

Consumption, government spending, and investment are inputs that can be used to calculate:

gross domestic product.

An economics professor starts with a value of one. She states to the class, 'I arrived at this value by adding the marginal propensity to consume (MPC) and the _____.'

marginal propensity to save (MPS)

You are discussing economics with a financial professional, and she states, 'I don't recommend using _____ per capita GDP for inflation measurements because it doesn't take into account price differences.'

real