Economics test #2
When you know the inflation rate, you can find out whether your income is
(1) keeping up with, (2) not keeping up with, or (3) more than keeping up with inflation.
Suppose that fixed investment is $550 billion and (total) investment is $630 billion. What does inventory investment equal? a. $80 billion b. $550 billion c. $630 billion d. $1,180 billion e. There is not enough information to answer this question
A
In the definition of GDP, the words "total market value" refer to total a. dollar value at base prices. b. dollar value at current prices. c. subjective value. d. objective value. e. a and d
B
Net exports equals a. exports divided by imports. b. the sum of exports and imports. c. exports minus imports. d. exports during the year. e. none of the above
C
Compensation of employees
Compensation of employees consists of wages and salaries paid to employees plus employers' contributions to Social Security and employee benefit plans plus the monetary value of fringe benefits, tips, and paid vacations.
"Full employment" is said to exist when the unemployment rate equals a. zero. b. the cyclical unemployment rate. c. the structural unemployment rate. d. the natural unemployment rate
D
Durable goods
Durable goods are goods that are expected to last for more than three years, such as refrigerators, ovens, or cars.
Business firms make which of the following two types of investment? a. foreign investment and domestic investment b. fixed investment and capital investment c. investment in stocks and investment in bonds d. investment in new capital goods and investment in used capital goods to replace "worn- out" capital goods e. fixed investment and inventory investment
E
Economic growth
Economic Growth is measured by increases in Real GDP
Why aren't stock purchases and sales counted in GDP?
GDP is a measure of production in a country. When stocks are purchased and sold, no production occurs. A stock purchase and sale simply represent the trading of existing assets. Specifically, if person A owns 100 shares of stock X and then sells the shares to person B, all that has happened is that person B owns something that person A once owned. No more goods and services have been produced
Ways to Compute GDP INCOME and Value -added Approaches
Income Approach - add the sum of all incomes earned (wages, interest, rents, and profits) in producing goods and services
Suppose the GDP for a country is $0. Does this mean that there was no productive activity in the country? Explain your answer.
No. GDP doesn't account for all productive activity (e.g., it omits the production of nonmarket goods and services). Even if GDP is $0, it doesn't necessarily follow that there was no production in the country.
Real income
Nominal income adjusted for price changes
Non durable goods
Nondurable goods are goods that are not expected to last for more than three years, such as food
Personal and disposable income
Personal income = National income - Undistributed corporate profits - Social insurance taxes - Corporate profits taxes + Transfer payments Disposable income = Personal income - Personal taxes
Business Cycle
Recurrent swings (up and down) in Real GDP
Services
Services are intangible items such as lawn care, car repair, and entertainment.
Nominal income
The current dollar amount of a person's income
Unemployment rate
The percentage of the civilian force that is unemployed
Labor force participation rate
The percentage of the civilian non-institutional population that is in the civilian labor force:
Investment
The sum of all purchases of: ➢Fixed Investment -Newly produced capital goods - Business purchases of capital goods, such as machinery and factories ➢Inventory Investment -Changes in business inventories (stock of unsold goods). ➢Purchases of new residential housing
Consumption
The sum of household spending on: ➢Durable goods ➢Nondurable goods ➢Services
Gross Domestic Product (GDP)
The total market value of all final goods and services produced annually within a country's borders.
National income
Total income earned by U.S. citizens and businesses, no matter where they reside or are located. ➢National income is the sum of the payments to resources (land, labor, capital, and entrepreneurship).
Ways to Compute GDP Income and VALUE -added Approaches
Value-added Approach - add the value added at each stage of production of all goods and services
Suppose GDP is $6 trillion in year 1 and $6.2 trillion in year 2. What has caused the rise in GDP?
We can't know for sure; we can say what may have caused the rise in GDP. It could be (a) a rise in prices, no change in output, (b) a rise in output , no changes in prices, (c) rises in both prices and outputs, (d) a percentage increase in prices that is greater than a percentage decrease in output, or some other situation.
. Can an economy be faced with endless business cycles and still have its Real GDP grow over time? Explain your answer.
Yes. Business cycles - ups and downs in Real GDP - don't prevent Real GDP from growing over time.
Price Level
the average of all prices in the economy
How you are doing depends on whether your income is rising by
the same percentage as, (2) a smaller percentage than, or (3) a greater percentage than the inflation rate, respectively.
A person is unemployed if he a. is a member of the civilian labor force, out of work, and actively seeking work. b. is 15 years old and seeking his first job. c. is out of work, available for work, but not actively seeking work. d. All of the above
A
A plumber who quits his job in San Diego and moves to Orlando where additional plumbers are needed is said to be ___________________ unemployed a. frictionally b. structurally c. cyclically d. underemployed
A
An example of income received but not earned is a. government transfer payments. b. undistributed profits. c. compensation of employees. d. rental income. e. a and c
A
Capital consumption allowance refers to a. capital goods being used up in production through natural wear, obsolescence, and accidental destruction. b. people sending money between countries. c. the purchase of used factories. d. the purchase of goods that allow households to consume more services.
A
Exhibit 6-1 Year CPI 1 217 2 220 3 225 4 231 5 240 Refer to Exhibit 6-1. Prices rose by approximately __________ percent from Year 1 to Year 5. a. 10.6 b. 9.6 c. 14.3 d. 4.5
A
Exhibit 6-2 Civilian Civilian Employed Noninstitutional Labor Force Persons Year Population (millions) (millions) (millions) 1 250 200 175 2 400 300 200 3 500 400 350 4 1000 800 720 Refer to Exhibit 6-2. How many unemployed persons are there in year 1? a. 25 million b. 50 million c. 75 million d. 175 million e. 200 million
A
GDP & bads
➢ GDP counts the goods and services, but it does not net out the air and water pollution. ➢Thus, some economists argue that GDP overstates our overall economic welfare
Ways to Compute GDP - Expenditure Approach
➢Add the amount of money spent by buyers of final goods and services* ➢Avoid double counting. ➢Do not count intermediate goods** * Goods in the hands of their final users. ** Goods that are inputs for the production of final goods
CPI
➢CPI is based upon a representative group of goods and services purchased by a typical household
What's Not Included in GDP
➢Certain non-market goods and services such as chores performed at home by family members. ➢Underground activities, both legal and illegal such as legal unrecorded activities paid for in cash or illegal gambling ➢Financial transactions such as trading of stocks and bonds ➢Government transfer payments , a payment to a person that is not for goods and services currently supplied such as social security ➢Leisure time
GDP
➢GDP Implicit Price Deflator is based upon all goods and services produced in an economy.
Macroeconomic Problems
➢High inflation rate ➢High unemployment rate ➢High interest rates ➢Low economic growth or stagnation
Unemployment?
➢Job loser. This is a person who was employed in the civilian labor force and was either fired or laid off. ➢Job leaver. This is a person employed in the civilian labor force who quits his or her job. ➢Reentrant. This is a person who was previously employed, hasn't worked for some time, and is currently reentering the labor force. ➢New entrant. This is a person who has never held a full-time job for two weeks or longer and is now in the civilian labor force looking for a job
Discouraged workers
➢They are former workers who are not actively looking for work and are not waiting to be called back to a job or to report for a job. ➢Discouraged workers are not counted as unemployed workers
Is it possible for a country with a relatively large GDP to have a relatively small per-capita GDP? a. Yes, since the country with a relatively large GDP could have a relatively large population. b. No, since countries with a relatively large GDP (such as the United States and Japan) also have relatively high per-capita GDP. c. Yes, but only under the condition that the country "produces" relatively more "bads" than other countries. d. Yes, since government transfer payments may be exorbitantly high in the country with the relatively high GDP. e. There is not enough information to answer this question
A
Look at the following data: durable goods = $200 billion; nondurable goods = $350 billion; services = $600 billion; fixed investment + inventory investment = $200 billion; government purchases = $400 billion; exports = $30 billion; imports = $79 billion. GDP is equal to a. $1,701 billion. b. $1,201 billion. c. $1,859 billion. d. $1,010 billion. e. There is not enough information to answer the question
A
Refer to Exhibit 6-2. The unemployment rate in year 1 is a. 12 1/2 percent. b. 70 percent. c. 87 1/2 percent. d. 30 percent. e. 10 percent.
A
Suppose the total market value of all final goods and services produced this year in economy X is $4 million. Of the $4 million worth of goods, $3 million is sold and $1 million is held in inventory. For this year, the GDP for economy X is a. $4 million. b. $3 million. c. $1 million. d. $7 million. e. none of the above
A
The expenditure approach to measuring GDP sums a. consumption, investment, government purchases, and net exports. b. sales, revenues, income, and wages. c. profits, compensation of employees, consumption, and investment. d. net exports, consumption, wages, and salaries.
A
Why do economists prefer to compare Real GDP figures for various years instead of GDP figures? a. Because when GDP in one year is higher than in another year, there is no way to tell why it is higher. Is it because output is higher, prices are higher, etc.? This is not the case with Real GDP. If Real GDP is higher in one year than in another year, it is because output is higher. b. Because when GDP in one year is higher than in another year, there is no way of knowing if the quality of goods produced is higher in one year than the other. This is not the case with Real GDP. If Real GDP is higher in one year than in another year, it is because the quality of the goods produced is higher. c. Actually the question is incorrect. Economists prefer to compare GDP figures instead of Real GDP figures. d. Because Real GDP is easier to compute than GDP. e. Because when GDP in one year is higher than in another year, there is no way to tell if the quality of life is higher in one year than the other. This is not the case with Real GDP. If Real GDP is higher in one year than in another year, it is because the quality of life is higher.
A
price index
A measure of the price level.
Consumer Price Index (CPI)
A widely cited index number for the price level; the weighted average of prices of a specific set of goods and services purchased by a typical household.
Who are the unemployed?
According to the BLS, unemployed persons consist of: • All persons who did not have jobs, who made specific active efforts to find a job during the prior four weeks, and who were available for work. • All persons who were not working and who were waiting to be called back to a job from which they had been temporarily laid off.
Who are the employed?
All persons who did any work for pay or profit during the survey reference week. • All persons who did at least 15 hours of unpaid work in a family-operated enterprise. • All persons who were temporarily absent from their regular jobs because of illness, vacation, bad weather, industrial dispute, or various personal reasons.
A person in the civilian labor force falls into one of two categories: a. a person who works in a service industry or a person who works in a manufacturing industry. b. unemployed or employed. c. disemployed or unemployed. d. a self-employed worker or a non-self-employed worke
B
Assume that Ms. Sawyer's salary is $75,000, up from $70,000 last year, while the CPI is 165 this year, up from 150 last year. This means that Ms. Sawyer's real income has a. increased. b. decreased. c. stayed the same. d. It depends on which year is the base year.
B
At the time of Carol's 10 year high school reunion she was making $30,000 and the CPI was 90. Now that it is time for her to attend her 20 year high school reunion, Carol's income has risen to $65,000 and the CPI is 200. At her 20 year reunion, can Carol rightfully brag that her real income has risen since the last time she saw her former classmates ten years ago? a. Yes, Carol's real income rose during that 10 year period. b. No, Carol's real income fell during that 10 year period. c. No, Carol's real income remained constant during that 10 year period. d. It is impossible to determine what happened to Carol's real income.
B
Increases in import spending a. raise GDP. b. lower GDP. c. are always balanced off in GDP by changes in exports. d. may raise or lower GDP
B
Is it possible for the economy to be at full employment and still have some people who are unemployed? a. No, full employment means that no one is unemployed. b. Yes, since full employment exists if the economy is operating at the natural unemployment rate and there is always some natural unemployment. c. Yes, since full employment exists if the economy is operating at the frictional unemployment rate and there is always some frictional unemployment. d. Yes, since full employment equals the sum of the cyclical unemployment rate and the natural unemployment rate, and there is always some cyclical unemployment. e. none of the above
B
One measure of the inflation rate is the a. sum of the CPIs of adjacent years. b. percentage change in the CPI of adjacent years. c. percentage change in the Real GDP of adjacent years. d. GDP minus the Real GDP in a year.
B
Real GDP is GDP a. in current-year prices. b. in base-year prices. c. in GDP-prices. d. in that year's prices
B
The standard definition of "recession" is a. a period of a positive frictional unemployment rate. b. two or more consecutive quarters of falling Real GDP. c. the lowest point in a business cycle. d. a period of negative inflation.
B
Which of the following would definitely not be included in the measurement of GDP? a. value of the services of a painter who paints your garage b. value of the services of a person who mows his or her own lawn c. value of the services of a maid who cleans your house d. value of the services of a plumber who fixes your kitchen sink
B
Which of the following would not be included in the calculation of this year's GDP? a. a headlight bulb purchased at Joe's Auto Supply by Susan to replace a burnt out bulb in her car b. a headlight bulb purchased by Ford Motor Co. from a supplier c. a headlight bulb produced but not sold this year and thus ending up as inventory d. none of the above, i.e., all would be included
B
A(n) __________ is a person who was previously employed, hasn't worked for some time, and is currently reentering the labor force. a. discouraged worker b. entrant c. reentrant d. job loser e. job leaver
C
In an economy with 200 million people, 150 million hold jobs and 20 million are not working but are looking for jobs. The number of people in the labor force is a. 200 million. b. 130 million. c. 170 million. d. 180 million.. e. There is not enough information to answer this question.
C
Juan lost his job as a nuclear physicist working for a defense contractor. He can not find a job because no firms in the defense industry or any other industry are hiring people with his skills. Juan is ______________ unemployed. a. frictionally b. cyclically c. structurally d. naturally
C
Suppose the market basket consists of 10X, 20Y, and 30Z. Current-year prices are $1.20 for each unit of X, $0.96 for each unit of Y, and $1.30 for each unit of Z. Base-year prices are $1.00 for each unit of X, Y, and Z. What is the approximate CPI in the current year? a. 17 b. 70.20 c. 117 d. 270
C
Suppose you have data on durable goods, nondurable goods, fixed investment, government purchases, exports, and imports. Can you compute GDP? a. No, since data on services and prices are missing. b. No, since data on inventory investment are missing. c. No, since data on inventory investment and services are missing. d. No, since data on services are missing. e. Yes.
C
The CPI was 138 in one year and 146 the following year. Approximately how much did prices rise between the two years? a. 4.29 percent b. 5.5 percent c. 5.8 percent d. 0.06 percent
C
The value of the consumer price index (CPI) is always equal to ______________ in the base year. a. 1 b. 10 c. 100 d. 1,000 e. There is not enough information given to answer this question.
C
What is the proper sequence of the phases of a business cycle? a. peak, contraction, trough, expansion, recovery b. peak, contraction, recovery, trough, expansion c. peak, contraction, trough, recovery, expansion d. contraction, peak, trough, recovery, expansion e. recovery, trough, peak, expansion, contraction
C
Which of the following items is a final good? a. mustard in a deli b. tin purchased by a can company c. a sweater purchased by someone in a department store d. a and b e. a, b, and c
C
Economic growth" has occurred if the a. inflation rate between this year and last year is zero or less. b. GDP this year exceeds the Real GDP this year. c. unemployment rate this year is above the natural rate of unemployment. d. Real GDP this year exceeds the Real GDP of last year.
D
If Real GDP was $8,742 billion in year 2 and it had been $8,509 billion in year 1, what was the approximate economic growth rate during this time period? a. 9.73 percent b. 2.67 percent c. 3.58 percent d. 2.74 percent
D
In year 1 the CPI is 144.1, and in year 2 the CPI is 161. If Sarah's salary was $49,800 in year 1, what salary in year 2 would cause her to exactly "keep up with inflation"? a. $34,004 b. $42,942 c. $40,508 d. $54,747
D
Suppose that 1982 is the base year for the Consumer Price Index (CPI) and in 2008 the CPI is 450. What does this "450" mean? a. What cost $100 in 1982 will on average cost 450 times as much in 2008. b. What cost $100 in 1982 will on average cost $450 more in 2008. c. What cost $100 in 1982 will on average cost 100/450 (or 0.22) times as much in 2008 (that is, it will cost $22 in 2008). d. What cost $100 in 1982 will on average cost $350 more in 2008.
D
Suppose there are 65 million people employed, 15 million unemployed, and 35 million not in the labor force. What does the civilian noninstitutional population equal? a. 80 million b. 110 million c. 65 million d. 115 million
D
The answer is "a person employed in the civilian labor force who quits his or her job." The question is: a. Who is a job loser? b. Who is an entrant? c. Who is a reentrant? d. Who is a job leaver? e. Who is a discouraged worker?
D
The base year is the year a. in which prices are unstable. b. in which prices are lowest. c. in which prices are highest. d. that serves as a reference point or benchmark. e. in which nominal output is largest.
D
The civilian non-institutional population can be broken down into two groups: a. employed persons and unemployed persons. b. persons working and persons not working. c. persons working in service jobs and persons working in manufacturing jobs. d. persons not in the labor force and persons in the labor force.
D
Unemployment that arises as a result of the time it takes for unemployed people to locate a job utilizing their transferable skills is called __________ unemployment. a. structural b. cyclical c. natural d. frictional
D
What does annual economic growth refer to? a. annual increases in GDP b. annual increases in consumption spending c. annual increases in investment spending d. annual increases in Real GDP e. none of the above
D
Which of the following statements is false? a. For purposes of computing GDP, the purchases of new residential housing are considered investment although it is undertaken by the household sector. b. Consumption includes spending on durable goods but not spending on services. c. Investment includes fixed investment but not inventory investment. d. b and c e. a, b, and c
D
The civilian non-institutional population consists of everyone in the population who is a. at least 16 years of age, in the armed forces, or institutionalized. b. at least 16 years of age. c. not in the armed forces. d. not institutionalized. e. b, c, and d
E
Which of the following does GDP omit? a. Jack purchases $2,300 worth of stock in company X. b. Bob mows his lawn and washes and irons his shirts. c. Helen receives $4,000 a year in Social Security payments. d. a and b e. a, b, and c
E
Net exports
Exports (X) - Total foreign spending on domestic (U.S.) goods Less Imports (M) - Total domestic (U.S.) spending on foreign goods
GDP - Expenditure Approach 4 Sectors
Household Sector - Consumption Business Sector - Investment Government Sector - Government Purchases Foreign Sector - Net Exports
Describe the expenditure approach to computing GDP in a real-world economy.
In the expenditure approach, GDP is computed by finding the sum of consumption, investment, government purchases, and net exports. (Net exports are equal to exports minus imports.)
Government purchases
Includes: Federal, state, and local government purchases of goods and services and gross investment in highways, bridges, and so on. Excludes: Government transfer payments to persons that are not made in return for goods and services currently supplied.
Inflation
Inflation is an increase in the price level and is usually measured on an annual basis. The inflation rate is the positive percentage change in the price level on an annual basis.
If the cyclical unemployment rate is positive, what does this imply?
It implies that the (actual, measured) unemployment rate in the economy is greater than the natural unemployment rate. For example, if the unemployment rate is 8 percent and the natural unemployment rate is 6 percent, the cyclical unemployment rate is 2 percent.
Suppose Real GDP is $5.2 trillion in year 1 and $5.3 trillion in year 2. What has caused the rise in Real GDP?
More output was produced in year 2 than in year 1.
Net domestic product
NDP measures the total value of new goods available in the economy in a given year after worn-out capital goods have been replaced. Net domestic product (NDP) = GDP - Capital consumption allowance* *The estimated amount of capital goods used up in production through natural wear, obsolescence, and accidental destruction.
Computing national income
National income = Compensation of employees + Proprietors' income + Corporate profits + Rental income +Net interest
Natural unemployment
Natural unemployment rate = Frictional unemployment rate + Structural unemployment rate.
What is the major difference between a person who is frictionally unemployed and one who is structurally unemployed?
The frictionally unemployed person has readily transferable skills, and the structurally unemployed person does not.
Identify and explain the three approaches to computing GDP.
The three approaches are expenditure, income, and value added. In the expenditure approach, we add the amount of money spent by buyers on final goods and services. In the income approach, we sum the payments to the resources of production. In our example in the text, income consisted of the returns to labor (wages) and entrepreneurship (profits).In the value-added approach, we sum the dollar value contribution over all stages of production
Unemployment
The total population of the United States can be divided into two broad groups. ➢One group consists of persons who are (1) under 16 years of age, (2) in the armed forces, or (3) institutionalized (in a prison, mental institution, or home for the aged). ➢ The second group, which consists of all others in the total population, is called the civilian non-institutional population.
Real gdp
The value of the entire output produced annually within a country's borders, adjusted for price changes (inflation).
base year
The year chosen as a point of reference or basis of comparison for prices in other years; a benchmark year.
Will GDP be smaller than the sum of consumption, investment, and government purchases if net exports are negative? Explain your answer.
Yes. To illustrate, suppose consumption is $200, investment is $80, and government purchases are $70. The sum of these three spending components of GDP is $350. Now suppose exports are $0 but imports are $100, which means that net exports are $100. Since GDP = C + I + G + (EX - IM),it follows that GDP is $250