Macro

A steel company sells some steel to a bicycle company for $150. The bicycle company uses the steel to produce a bicycle, which it sells for $250. Taken together, these two transactions contribute

$250 to GDP.

If the price index was 90 in Year 1, 100 in Year 2, and 95 in Year 3, then the economy experienced

11.1 percent inflation between Years 1 and 2, and 5 percent deflation between Years 2 and 3.

Suppose that you have received $300 as a birthday gift. You can spend it today or you can put the money in a bank account for a year and earn 5 percent interest. The opportunity cost of spending the money today, in terms of what you could have after one year, is

315

Which of the following is included in GDP?

Both the market value of rental housing services and the market value of owner-occupied housing services

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because the

CPI better reflects the goods and services bought by consumers.

U.S. GDP and U.S. GNP are related as follows:

GNP = GDP − Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.

Cole is refinishing an antique china cabinet and has already spent $180 on the restoration. He expects to be able to sell the cabinet for $360. Cole discovers that he needs to do an additional $200 worth of work to make the cabinet worth $360 to potential buyers. He could also sell the cabinet now, without completing the additional work, for $100. What should Cole do?

He should complete the additional work and sell the cabinet for $360.

Martin, a U.S. citizen, travels to Mexico and buys a newly manufactured motorcycle made there. His purchase is included in

Mexican GDP, but it is not included in U.S. GDP.

If the current year CPI is 90, then the price level has decreased 10 percent since the base year.

True

Economic models

are usually composed of diagrams and equations.

Making rational decisions at the margin means that people

compare the marginal costs and marginal benefits of each decision.

Inflation increases the value of money.

false

Government purchases include spending on goods and services by

federal, state, and local governments.

In the markets for factors of production in the circular-flow diagram,

households provide firms with labor, land, and capital.

When a production possibilities frontier is bowed outward, the opportunity cost of producing an additional unit of a good

increases as more of the good is produced.

The CPI differs from the GDP deflator in that

increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator.

A farmer produces oranges and sells them to Fresh Juice, which makes orange juice. The oranges produced by the farmer are called

intermediate goods.

Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy

more milk and more T-shirts.

Suppose the cost of operating a 75 room hotel for a night is $6,000 and there are 5 empty rooms for tonight. If the marginal cost of operating one room for one night is $40, the hotel manager should rent one of the empty rooms only if a customer is willing to pay

more than $40, as the marginal benefit will exceed the marginal cost.

Production is efficient if the economy is producing at a point

on the production possibilities frontier.

A country reported nominal GDP of $100 billion in 2010 and $75 billion in 2009. It also reported a GDP deflator of 125 in 2010 and 120 in 2009. Between 2009 and 2010,

real output and the price level both rose.

The production possibilities frontier is a graph that shows the various combinations of output that an economy can possibly produce given the available factors of production and

the available production technology.

Mina decides to spend three hours working overtime rather than going to the park with her friends. She earns $20 per hour for overtime work. Her opportunity cost of working is

the enjoyment she would have received had she gone to the park.

Economics is the study of how society manages its

unlimited wants and limited resources

In the simple-circular flow diagram, the flow of money from the firms to the markets for factors of production is called

wages, rent, and profit.