macro midterm #2

What causes GDP to rise between the years?

1. the economy may be producing a larger output of goods and services, 2. goods and services could be selling at higher prices.

The consumer price index was 120 in 2013 and 126 in 2014. The nominal interest rate during this period was 8 percent. What was the real interest rate during this period? A) 3 percent B) 2 percent C) 3.3 percent D) 12.8 percent

A) 3 percent

GDP is...

The most closely watched economic statistic because it is thought to be the best single measure of a society's economic well-being.

Composition of GDP

Y = C + I + G + NX

What question does CPI try to answer?

as prices change, by how much will the typical consumer's spending have to increase to purchase the same basket of goods?

Government Purchases

include spending on goods and services by local, state, and federal governments

net exports

exports-imports

Consumption

is spending by households on goods and services

Investment

is the purchase of goods that will be used in the future to produce more goods and services.

GDP Deflator =

(Nominal GDP/Real GDP) × 100

tho change dollar values from one year to the next

(𝑉𝑎𝑙𝑢𝑒 𝑖𝑛 𝑌𝑒𝑎𝑟 1 𝑑𝑜𝑙𝑙𝑎𝑟𝑠/𝑉𝑎𝑙𝑢𝑒 𝑖𝑛 𝑌𝑒𝑎𝑟 2 𝑑𝑜𝑙𝑙𝑎𝑟𝑠)= (𝑃𝑟𝑖𝑐𝑒 𝐿𝑒𝑣𝑒𝑙 𝑖𝑛 𝑌𝑒𝑎𝑟 1/𝑃𝑟𝑖𝑐𝑒 𝐿𝑒𝑣𝑒𝑙 𝑖𝑛 𝑌𝑒𝑎𝑟 2)

𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠 𝑡𝑜 𝑑𝑜𝑢𝑏𝑙𝑒 =

70/𝐺𝑟𝑜𝑤𝑡h 𝑅𝑎𝑡𝑒

Between October 2014 and October 2015, the CPI in Canada rose from 120 to 124 and the CPI in Mexico rose from 210 to 229.1. What were the inflation rates for Canada and Mexico over this one-year period? A) 3.3 percent for Canada and 9.1 percent for Mexico B) 3.3 percent for Canada and 8.3 percent for Mexico C) 3.2 percent for Canada and 9.1 percent for Mexico D) 3.2 percent for Canada and 8.3 percent for Mexico

A) 3.3 percent for Canada and 9.1 percent for Mexico

If an economy is growing at 6% a year while the population is growing at 3% a year, what is true about this economy? A) The standard of living is rising. B) The standard of living is falling. C) The standard of living is not changing. D) Indeterminate.

A) The standard of living is rising.

A U.S. grocery chain purchases olive oil from Tunisia and sells it to U.S. consumers. In which of the following is this transaction included? A) U.S. consumption and U.S. imports B) U.S. consumption but not U.S. imports C) U.S. imports but not U.S. consumption D) neither U.S. consumption nor U.S. imports

A) U.S. consumption and U.S. imports

Other things the same, when an economy increases its saving rate ... A) consumption and production rise now. B) consumption rises now and production rises later. C) consumption falls now and production rises later. D) consumption falls now and production falls later.

A) consumption and production rise now.

A country's human capital increases ... A) if its workers become better educated and healthier. B) only if its workers become better educated. C) only if its workers become healthier. D) None of the above is correct.

A) if its workers become better educated and healthier.

A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move ... A) raises GDP. B) decreases GDP. C) doesn't change GDP because gambling is never included in GDP. D) doesn't change GDP because in either case his income is included.

A) raises GDP.

Long-run economic growth has been mostly dependent on ... A) rising productivity. B) a low unemployment rate. C) an increase in the population which eventually leads to an increase in the labor population. D) countries following the rule of 70.

A) rising productivity.

In 1931, President Herbert Hoover was paid a salary of $75,000. Government statistics show a consumer price index of 15.2 for 1931 and 229.6 for 2012. President Hoover's 1931 salary was equivalent to a 2012 salary of about ... A) $4,965. B) $1,132,895. C) $1,057,894. D) $16,080,001.

B) $1,132,895

If the CPI was 95 in 1955 and is 475 today, then $100 today purchases the same amount of goods and services as ... A) $4.75 purchased in 1955. B) $20.00 purchased in 1955. C) $95.00 purchased in 1955. D) $500 purchased in 1955.

B) $20.00 purchased in 1955

A dairy buys $50,000 worth of milk and spend $5,000 on cartons and utilities. It sells the cartons of milk to a grocery store for $60,000 that then sells all of the cartons to consumers for $65,000. How much do these actions add to GDP? A) $55,000 B) $65,000 C) $120,000 D) None of the above are correct.

B) $65,000

All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit? A) Output will rise by more than it did when the previous unit was added. B) Output will rise but by less than it did when the previous unit was added. C) Output will fall by more than it did when the previous unit was added. D) Output will fall but by less then it did when the previous unit was added.

B) Output will rise but by less than it did when the previous unit was added.

Which of the following statements is correct? A) Productivity is a determinant of human capital per worker. B) Technological knowledge is a determinant of productivity. C) Human capital and technological knowledge are the same thing. D) All of the above are correct.

B) Technological knowledge is a determinant of productivity.

An increase in the price of imported coffee shows up ... A) in the consumer price index and in the GDP deflator. B) in the consumer price index, but not in the GDP deflator. C) in the GDP deflator, but not in the consumer price index. D) in neither the consumer price index nor in the GDP deflator.

B) in the consumer price index, but not in the GDP deflator.

The catch-up effect refers to the idea that ... A) saving will always catch-up with investment spending. B) it is easier for a country to grow fast and so catch up if it starts out relatively poor. C) population eventually catches-up with increased output. D) if investment spending is low, increased saving will help investment to "catch-up."

B) it is easier for a country to grow fast and so catch up if it starts out relatively poor.

10. Which of the following is included in the investment component of GDP? A) spending on new residential construction and spending on stocks and bonds B) spending on new residential construction but not spending on stocks and bonds C) spending on stocks and bonds but not spending on new residential construction D) neither spending on stocks and bonds nor spending on new residential construction

B) spending on new residential construction but not spending on stocks and bonds

Sam, an American citizen, prepares meals for his family at home. Ellen, a Canadian citizen, commutes to the U.S. to help prepare meals at a restaurant in Idaho. Whose value of services preparing meals is included in U.S. GDP? A) Sam's and Ellen's. B) Sam's but not Ellen's. C) Ellen's but not Sam's. D) Neither Sam's nor Ellen's.

C) Ellen's but not Sam's.

. In computing the consumer price index, a base year is chosen. Which of the following statements about the base year is correct? A) Thebaseyearisalwaysthefirstyearamongtheyearsforwhichcomputationsarebeing made. B) It is necessary to designate a base year only in the simplest case of two goods; in more realistic cases, it is not necessary to designate a base year. C) The value of the consumer price index is always 100 in the base year. D) The base year is always the year in which the cost of the basket was highest among the years for which computations are being made.

C) The value of the consumer price index is always 100 in the base year.

The nominal interest rate tells you ... A) the number of dollars in your bank account today. B) the purchasing power of your bank account today. C) how fast the number of dollars in your bank account rises over time. D) how fast the purchasing power of your bank account rises over time.

C) how fast the number of dollars in your bank account rises over time.

When a country saves a larger portion of its GDP than it did before, it will have ... A) more capital and higher productivity. B) more capital and lower productivity. C) less capital and higher productivity. D) less capital and lower productivity.

C) less capital and higher productivity.

Transfer payments are ... A) included in GDP because they represent income to individuals. B) included in GDP because they eventually will be spent on consumption. C) not included in GDP because they are not payments for currently produced goods or services. D) not included in GDP because taxes will have to be raised to pay for them.

C) not included in GDP because they are not payments for currently produced goods or services.

Which of the following transactions is not included in GDP? A) oranges sold to households by a grocery store. B) orange juice sold by a restaurant to its diners. C) oranges sold by a farmer to a grocery store. D) All of the above are included in GDP.

C) oranges sold by a farmer to a grocery store.

The consumer price index is subject to substitution bias because ... A) some pairs of goods are complements rather than substitutes. B) some goods are inferior rather than normal. C) the law of demand applies to goods and services purchased by a typical consumer. D) the index does not take into account the likelihood that consumers substitute newly introduced goods for more established goods.

C) the law of demand applies to goods and services purchased by a typical consumer.

Last year real GDP in the imaginary nation of Oceania was $5,610,000 and the population was 2,200. The year before, real GDP was $5,000,000 and the population was 2,000. What was the growth rate of real GDP per person during the year? A) 12 percent B) 10 percent C) 4 percent D) 2 percent

D) 2 percent

If the economy of Country Y is growing at an annual rate of 3.5%, how long will it take for the size of this economy to double? A) 70 years B) 7 years C) 10 years D) 20 years

D) 20 years

If real GDP is 5,100 and nominal GDP is 4,900, then the GDP deflator is ... A) 104.1 so prices are higher than in the base year. B) 104.1 so prices are lower than in the base year. C) 96.1 so prices are higher than in the base year. D) 96.1 so prices are lower than in the base year.

D) 96.1 so prices are lower than in the base year.

If the CPI was 125 this year and 120 last year, then ... A) the cost of the CPI basket of goods and services increased by 4.2 percent this year. B) the price level increased by 4.2 percent this year. C) the inflation rate for this year was 4.2 percent. D) All of the above are correct.

D) All of the above are correct.

Which of the following is a true statement about real and nominal GDP? A) If nominal GDP increases from one year to the next, we know that production of goods and services has risen. B) Nominal GDP is a better measure than real GDP in comparing changes in the production of goods and service year after year. C) Increases in average prices do not affect the calculation of nominal GDP. D) If real GDP increases from one year to the next, we know that production of goods and services has risen.

D) If real GDP increases from one year to the next, we know that production of goods and services has risen.

The Patersons bought a home that was newly constructed in 2007 for $275,000. They sold the home in 2015 for $255,000. Which of the following statements is correct regarding the sale of the house? A) The 2015 sale increased 2015 GDP by $255,000 and had no effect on 2007 GDP. B) The 2015 sale reduced 2015 GDP by $20,000 and had no effect on 2007 GDP. C) The 2015 sale increased 2015 GDP by $255,000; and caused 2007 GDP to be revised downward by $20,000. D) The 2015 sale affected neither 2007 GDP nor 2015 GDP.

D) The 2015 sale affected neither 2007 GDP nor 2015 GDP.

Which of the following statements is correct? A) The percentage change in the CPI is a measure of the inflation rate, but the percentage change in the GDP deflator is not a measure of the inflation rate. B) ComparedtotheCPI,theGDPdeflatoristhemorecommongaugeofinflation. C) The GDP deflator better reflects the goods and services bought by consumers than does the CPI. D) The CPI can be used to compare dollar figures from different points in time.

D) The CPI can be used to compare dollar figures from different points in time.

The consumer price index (CPI) and the GDP deflator are two alternative measures of the overall price level. Which of the following statements about the two measures is correct? A) The CPI involves a base year; the GDP deflator does not involve a base year. B) The CPI can be used to compute the inflation rate; the GDP deflator cannot be used to compute the inflation rate. C) The CPI reflects current production of goods and services; the GDP deflator reflects a fixed basket of goods and services. D) The CPI reflects the prices of goods and services bought by consumers; the GDP deflator reflects the prices of goods and services produced domestically.

D) The CPI reflects the prices of goods and services bought by consumers; the GDP deflator reflects the prices of goods and services produced domestically.

The nominal GDP of the U.S. in 2018 was approximately $20.9 trillion. This means that ... A) the value of output in 2018 was around $20.9 trillion. B) total income in 2018 was around $20.9 trillion. C) total spending in 2018 was around $20.9 trillion. D) all of the above is true.

D) all of the above is true.

Nominal GDP will increase ... A) only if the price level rises. B) only if the price level falls. C) only if the quantity of final goods and services produced rises. D) if either the price level or the quantity of goods and services produced rises.

D) if either the price level or the quantity of goods and services produced rises.

Which of the following will increase a country's real GDP per person? A) imposing restrictions on foreign trade and foreign investment B) imposing restrictions on foreign trade and reducing restrictions on foreign investment C) reducing restrictions on foreign trade and imposing restrictions on foreign investment D) reducing restrictions on foreign trade and foreign investment

D) reducing restrictions on foreign trade and foreign investment

Which of the following is not a widely acknowledged problem with using the CPI as a measure of the cost of living? A) substitution bias B) introduction of new goods C) unmeasured quality change D) unmeasured price change

D) unmeasured price change

GDP measures...

The total income of everyone in the economy and the total expenditure on the economy's output of goods and services.

Consider a small economy in which consumers buy only two goods: apples and pears. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that ... A) B) C) D) the number of apples bought by the typical consumer is equal to the number of pears bought by the typical consumer in each year. neither the number of apples nor the number of pears bought by the typical consumer changes from year to year. the percentage change in the price of apples is equal to the percentage change in the price of pears from year to year. neither the price of apples nor the price of pears changes from year to year.

neither the number of apples nor the number of pears bought by the typical consumer changes from year to year.

What does the GDP deflator measure?

the current level of prices relative to the level of prices in the base year.

Limitations of GDP

• household production; • underground economy; • any other non-market activity (volunteer work, bartering etc).

𝑅𝑒𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 =

𝑁𝑜𝑚𝑖𝑛𝑎𝑙 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 − 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑅𝑎𝑡𝑒