Macro 5-8
Each year when they announce the awards for best new restaurants, the recipients are almost always in the large cities. These restaurants are praised for their creativity and bold new dishes. What are some of the factors that would explain why the innovative restaurants are found in big cities?
- Larger cities allow for the specialization of labor, which can lead to greater creativity among chefs. - In larger markets, restaurants have more incentives to come up with innovative and creative new dishes. - There are more chances to have face-to-face interactions, which can lead to increased innovation and creativity.
Suppose a country makes substantial investments to improve its roads. Give an example(s) of how this would improve productivity in the economy as a whole.
- Total transportation costs would be reduced. - Substantial investments to improve the roads would encourage private investment.
An item in the federal budget that is not included as government purchases in GDP is ___________________. . An item included in government purchases but not part of the federal budget is ___________________.
1. Interest on government debt 2. state government purchases
Suppose the starting salary for a new assistant economics professor was $19 comma 000 in 1976 and $80 comma 000 in 2014. The value of the CPI for 2014 was 236.7, compared to 56.9 in 1976. A newly-hired professor earned more in real terms in _________, with a real salary of __________.
2014, $33,798
Most states do not replace the entire wages of individuals on unemployment insurance; instead, they replace about _____
40%
In Central and South America, the size of the underground economy is
41% of GDP
In January 2018, more than 34 percent of the unemployed had been unemployed less than _______.
5 weeks
Using the data in the table shown at right, the two most severe recessions since World War II in terms of the fall from peak to trough are...
6 & 11
Which of the following are not included in GDP?
A mother taking care of children at home.
Economic historians have found that the average height of individuals in both the United States and the United Kingdom fell during the mid-nineteenth century before rising again. A. This was a period of rapid industrialization as well as migration into urban areas. What factors do you think might account for this fall in height? B. How would you evaluate economic welfare during this period?
A. All of the above B. Economic welfare decreased as measured by average height.
Some economists say that economic growth involves a trade-off between current generations and future generations. A. If a current generation raises its saving rate, what does it sacrifice? B. What will be gained for future generations?
A. Current consumption B. both A & B
Some economists are concerned about the "brain drain," the phenomenon in which highly educated workers leave developing countries to work in developed countries. Other economists have argued that "brain drain" could create incentives for others in the country to secure increased education and many of the newly educated might not emigrate. A. Explain why the "brain drain" could lead to increased education among the remaining residents. B. How would you test this theory?
A. When highly educated workers leave, more high paying jobs become available. B. All of the above.
Suppose the U.S. government hires workers who are currently unemployed but does not give them any work to do. What will happen to the measured U.S. unemployment rate? A. The unemployment rate will _______. B. Under these circumstances, do changes in the measured U.S. unemployment rate accurately reflect changes in the underlying economic situation and production?
A. decrease B. No, GDP will increase through the underlying economic situation will not have improved
The graph at right shows total output as a function of the stock of capital and two lines of depreciation as a function of the stock of capital. The initial depreciation line is dK, and the new depreciation line is dK'. A. In this case, the society switches to equipment that depreciates __________. B. In this case, the stock of capital will _________ and output Y will ____________.
A. slowly B. increase, increase
In an economy with no government sector or foreign sector, saving must equal investment because
All of the above
What other information might you want to know about these and other recessionary periods to judge their severity?
All of the above
Which of the following may influence technological progress?
All of the above
Air quality in Los Angeles deteriorated in the 1950s through the 1970s and then improved in the 1980s and 1990s. Can a change in air quality such as this be incorporated into our measures of national income?
All of the above are reasonable arguments.
With secure land titles, parents can work outside the home (rather than guarding their property) and earn higher incomes. Explain why this might reduce child labor.
All of the above.
How do you think the Internet and online shopping would affect the menu costs of inflation?
Any of the above are reasonable arguments.
In Japan, it is a custom for the bride's family to give a gift having very large monetary value to the family of the groom. How might this affect the savings rate in this country?
Both A and B
Some critics of cultural theories of economic growth note that some societies can suddenly start to grow very rapidly with no obvious accompanying cultural changes. How well does Professor Gregory Clark's theory fit the rapid growth in some East Asian economies in recent years?
Clark's theory fits well with the rapid growth in East Asian economies since western values have become more acceptable.
Economic models that assume that wages and prices adjust freely to changes in demand and supply are known as ____________ models.
Classical
What is the largest component of national income?
Compensation of employees (wages and benefits).
The three key types of unemployment are
Cyclical, Frictional and structural
Although people with high incomes appear to be happier than those with low incomes, people in the United States in general have become less happy over the last 30 years even though real GDP has risen. Why might increases in real GDP not necessarily have increased happiness?
Everyday life has become more stressful.
Suppose we view the financial crisis of 2007 as a negative technological shock. According to the real business cycle model, wages will _________ and potential output will__________.
Fall, Fall
Economist William Easterly is a strong proponent of foreign aid.
False
New growth theory suggests that consumption spending will lead to permanent increases in the rate of technological progress.
False
The average annual inflation rate in the United States was higher from 1990 to 2017 than it was from 1970 to 1980.
False
Shoe-leather costs typically decrease with the rate of inflation..
False
Robert is 62 and lost his job in an engineering firm. Pamela is 53 and lost her job. The labor force participation rates ...
For men will decline if Robert retires but will increase for women if Pamela seeks another job
Some economists have suggested that the time it takes the economy to recover to the level where it originally was when the recession started is a good measure of the speed of a recovery. This measure tells you how long it takes to ...
Get back to the peak before the recession started
Suppose local governments in suburban communities around the country started building large community swimming pools. Identify what type of spending this might crowd out, and compare this to the effect of government spending on exploration of Mars.
Government spending on large community swimming pools crowds out business investment, whereas government spending on exploration of Mars does not crowd out any spending.
The circular flow describes the process by which GDP generates _____________ , which is spent on goods and services.
Income
In the circular flow diagram, why do the arrows corresponding to the flow of dollars and the arrows corresponding to the flow of goods go in the opposite direction?
Income is exchanged for good and goods are exchanged for income
Which of the following will promote economic growth through capital deepening?
Increased imports to purchase supercomputers for industry.
Suppose that a group of consumer activists claims that drug companies earn excessive profits because of the patents they have on drugs. The activists advocate cutting the length of time that a drug company can hold a patent to five years. They argue that this will lead to lower prices for drugs because competitors will enter the market after the five-year period. Do you see any drawbacks to this proposal?
It will reduce the incentive for drug companies to invent new drugs.
Which of the following countries experienced a deflation in the 1990s?
Japan
In Economy A, the government puts workers on the payroll who cannot find jobs for long periods, but these "employees" do no work. In Economy B, the government does not hire any long-term unemployed workers but gives them cash grants. Comparing the GDP statistics between the two otherwise identical economies, what can you determine about measured GDP and the actual level of output in each economy?
Measured GDP is higher in economy A, though the actual level of output in each economy is the same.
In the United States, it is relatively easy to obtain a mortgage to buy a house or borrow money to buy a car. Credit card offers appear routinely in the mail. These factors most likely have a ___________ effect on the rate of household savings.
Negative
In an open economy, increases in government spending can crowd out consumption, investment, or
Net exports
What do we add to GDP to reach GNP?
Net income earned abroad by U.S. holders
An economy increased employment first from 10,000 to 20,000 and then from 20,000 to 30,000. The corresponding increases in output were 15,000 and 20,000 respectively. Nothing else changed during this period. Did this economy exhibit law of diminishing marginal returns?
No, because changes in output rose.
Suppose Ireland, prior to the potato famine, was at point a with Upper L 1 units of labor and Upper K 1 units of capital producing Upper Y 1 units of output.
Output decreased as Ireland slid to the left along its production function.
Which of the following is not included in the labor force?
People who do not have jobs, and do not want one
In China, housing is very expensive in large cities and purchasers must pay the full amount from their own resources as mortgages are not that common. These factors most likely have a __________ effect on the rate of household savings.
Positive
If individuals who had previously left the labor force returned and began searching for a job, the measured unemployment rate will _________.
Rise
Robert is 62 and lost his job in an engineering firm. Pamela is 53 and lost her job. What options do you think Robert has that Pamela does not?
Robert can retire and collect Social Security but Pamela does not
____________ and ____________ are the two factors that determine how the stock of capital changes over time.
Saving, depreciation
When online movies began to replace stores renting DVDs, what type or types of unemployment was created?
Structural and frictional
Every year, the Philippines sends many workers abroad including nurses, health professionals, and oil workers. How do you think GNP and GDP in the Philippines compare?
This increases the Philippines' GNP by the net income earned abroad but does not change its GDP.
In Europe, the average resident takes several weeks more of vacation time than in the United States. Per-capita income, however, is higher in the United States than the European average. What can you say about relative economic welfare in Europe versus the United States?
To compare the two regions in terms of true economic welfare, you would have to put some value on the additional leisure time.
What part of government spending is excluded from GDP?
Transfer Payments
A higher saving rate will lead to a higher stock of capital in the long run.
True
China has a higher rate of technological progress than India.
True
Debtors gain from unanticipated inflation.
True
Individuals who are working part time for economic reasons and would like to work full time are not counted as unemployed in the traditional unemployment statistics.
True
The classical school of thought came to its fruition during the 1930's
True
The typical European works less hours per year than the typical U.S. worker.
True
When the economy is at full employment, there is no cyclical unemployment.
True
Men's reported happiness has increased relative to women's reported happiness in the last several decades
True
Why do economists say that labor bears the full burden of the tax in this case?
Wages decrease by an amount equal to the tax.
If the labor-supply curve were horizontal, what would be the effects on wages, output, and employment?
Wages would be unchanged, but output and employment would decrease
If the labor-supply curve is vertical, what are the effects on real wages, output, and employment?
Wages decrease, but output and employment are unchanged.
If we cannot measure every invention or new idea, how can we possibly measure the contribution to growth of technological progress?
We can measure the effects of technological progress indirectly using growth accounting methods.
Why might you expect individuals who were unemployed in their 20s to have lower wages at the age of 40 than individuals with identical educational backgrounds but who were not unemployed?
While unemployed, workers lose some of their skills.
Suppose a community spends $1 million on salaries and equipment for its police department. Because it believes that citizens are now more law abiding, the community decides to cut back on the number of police it employs. As a result, the community now spends $800,000 less on the police officers. The crime rate remains the same. a. What happens to measured GDP? b. Does this change in GDP accurately reflect welfare in this case?
a. GDP falls by $800,000 b. No, because the crime rate has not changed
A trade deficit occurs when our exports ____________________ our imports.
are less than
Rising oil prices, which benefit some industries more than others,
can increase or decrease frictional unemployment
A policy of not enforcing patents or copyrights would _________ the incentive to be innovative.
decrease
Paul has young children at home and his wife is an executive at a major corporation. He has decided to work part time as a freelance blogger for an entertainment Web site. nothing Paul is considered to be...
employed
The production function illustrates the relationship between
factors of production and output
The natural rate of unemployment consists solely of
frictional and structural unemployment.
In many African countries, the government and international corporations pay high wages for jobs in the major cities, and many people migrate to the cities from farms where earnings are low. Unemployment rates in the city, therefore, are large. This can be explained in terms of
frictional unemployment because people are migrating and changing jobs.
Another term for potential output is ...
full-employment output
Some economists have argued that while immigration does not have a major effect on the overall level of wages for the entire economy, it does decrease wages near the Mexican border. Mexican immigration will
have a stronger impact on supply near the border, but may not affect the overall supply of labor for the entire U.S. economy.
When considering expenditures categories, the elderly might have more expenditures in
housing and medical care and less in transportation, education, and food.
A simple real business cycle explains all economic fluctuations with just technology shocks. During the Great Depression, real wages increased, which is
inconsistent with a simple real business cycle because if there is a negative technology shock, output and real wages would both fall.
Consider this statement: Since capital is subject to diminishing returns, an increase in the supply of capital will reduce real wages. This statement is wrong because an increase in the supply of capital will...
increase the marginal benefit from employing labor and therefore increase the demand for labor and real wages.
Suppose a government places a 10 percent tax on incomes and spends 40 percent of the money from taxes on investment and the rest on public consumption goods, such as military parades. Individuals save 30 percent of their income and consume the rest. In this case, total investment (public and private) ...
increases
Buying a foreign car made abroad for $50,000
increases consumption by $50,000, increases imports by $50,000, leaves exports unchanged, decreases net exports by $50,000, but does not change GDP.
Suppose you buy a new car for $20,000. One year later it is worth $15,000, and two years later it is worth $13,200. The depreciation on the car ...
is 34 percent for the two years overall.
Computers have revolutionized banking for consumers through the growth of ATMs and electronic bill paying capabilities. All of these improvements for consumers might not be counted as technological progress because technological progress
is defined by economists as an increase in output with no additional increases in inputs.
Compared to other countries, the United States has a relatively _______ share of consumption spending in GDP.
large
Australia contains many natural resources and foreign firms often come into Australia to extract them. The profits that those foreign firms make are sent back to their home countries. GDP in Australia is...
larger than GNP in Austrailia because the profits that are earned by foreign firms are sent back to their home country
You might think it would be worse if other people are unemployed at the same time as you were because it would be harder to find a job. But the psychological evidence shows the opposite. Unemployment may seem less painful to individuals if their peers are also unemployed because
misery loves company.
Basing your answer on the research reported in the text, India is
more vulnerable now to increases in temperatures than it will be in twenty years because more development will allow the economy adapt to higher temperatures.
The elderly might consume a different basket of goods than the average for the U.S. population because their
needs and wants are different because they are at a different stage in life.
Capital deepening comes to an end because of the
principle of diminishing returns.
We can measure the output of an economy by looking at either production or income because
production generates income
Roughly 10 percent of the populations of the Phillipines works overseas. Suppose overseas Philippine workers returned to their home country. Relying on the linked figure, this reverse flow of people on wages and employment will
raise wages in the U.S. and lower wages in the Phillipines
The GDP deflator is calculated for any given year by dividing nominal GDP by ___________ GDP and multiplying by 100.
real
To gauge living standards across countries with populations of different sizes, economists use
real GDP per capita
The single largest component of the basket of goods that comprises the CPI is the category for
rent.
An increase in labor force participation will shift the labor-supply curve to the _________, leading to lower real wages and higher employment.
right
in the amount of capital in the economy will shift the demand for labor curve to the _________, leading to higher real wages and employment.
right
Using the Penn World Tables (http://www.rug.nl/research/ggdc/data/pwt/) for real gross domestic product per capita, compare the relative growth performance for real GDP per capita of France and Japan from 1950 to 2000. The data ___________ the theory of convergence.
support
Once we account for changes in the labor force, ______________________ is the next biggest source of the growth of GDP in the United States.
technological progress
Convergence is the process by which poorer countries close the gap with richer countries in terms of real GDP per capita. Suppose the line in the figure at right pointed up and to the right. That would tell us....
that there is less of a tendency for convergence.
The line for nominal GDP lies below the line for real GDP in the years prior to 2012 because... (graph)
the GDP deflator is less than 100
Per-capita output is higher in the United States than in Germany and yet output per worker is higher in Germany. According to recent studies, the main cause for this is the difference in
the amount of labor their workers supply to the market.
Facebook does not sell products but does generate value added. You could measure its value added as the sum of
the payments it makes to its factors, including its profits
Top athletes or entertainers would be more likely to change countries to reduce their taxes as compared to ordinary middle-class workers because
these individuals can realize more tax savings than ordinary middle-class workers who have lower incomes.
Soft drink companies spend a considerable amount of money on marketing. These expenditures could be considered a form of capital because
this intangible capital is an important source of economic growth.
An increase in the stock of capital shifts the production function
upward
Many economists believe countries that open themselves to foreign investment of plant and equipment will benefit in terms of increased technological change because local companies will learn from the foreign companies. In the last several decades, China has been more open to foreign investment than India. This is consistent with the two countries' patterns of economic growth because
China's growth in GDP was much higher than India's growth in GDP.
Suppose a health worker visited one village and personally gave residents sweets in order to take vaccinations. In this village, vaccination rates increased. Is this strong evidence that giving sweets would increase vaccination rates?
No, because the worker only visited one village and it was not a controlled experiment.
The four factors included in the expanded circular flow but not in the simple circular flow are
government, exports, imports, and taxes.