Macroeconomics Midterm

Supply shifters include

Input prices such as wages & prices of raw materials, technology, # of sellers & expectations

Law of supply

the claim that the quantity supplied of a good rises when the price of a good rises, other things equal

What are the problems with CPI?

- Substitution Bias - Introduction of new goods - Unmeasured quality change

What does CPI (Consumer Price Index) measure?

- the typical consumer's cost of living - the basis of costs of living adjustments

What are the main differences between CPI and GPD?

-Imported consumer goods are included in the CPI, but excluded from the GDP deflator -Capital goods are excluded from CPI, but included in GDP deflator (if produced domestically) -The CPI uses a fixed basket, but the GDP deflator uses basket of currently produced goods and services

How does unmeasured quality change affect CPI?

-Improvements in the quality of goods in the basket increase the value of each dollar -The BLS tries to account for quality change, but probably misses some, as quality is hard to measure -Thus, CPI overstates increases in the cost of living

How does the introduction of new goods affect CPI?

-It increases variety, allowing consumers to find products that more closely meet their needs -Dollars become more valuable -CPI misses this substitution, because it is a fixed basket of goods -Thus, CPI overstates increases in the cost of living

The real interest rate is

-corrected for inflation -the rate of growth in the purchasing power of a deposit or debt - (nominal interest rate)-(interest rate)

What is substitution bias?

-over time, some prices rise faster than others -consumers substitute towards goods that become relatively cheaper, mitigating the effects of price increases -CPI misses this substitution, because it is a fixed basket of goods -Thus, CPI overstates increases in the cost of living

The nominal interest rate is

-the interest rate not corrected for inflation -the rate of growth in the dollar value of a deposit or debt

How is CPI calculated?

1. Fix the "basket" The BLS surveys consumers to determine what's in the typical consumer's "shopping basket" 2. Find the prices The BLS collects data on the prices of all the goods in the basket 3. Compute the basket's cost Use the prices to compute the total cost of the basket 4. Choose a base year and compute the index 100 x (cost of basket in current year/cost of basket in base year) 5. Compute the inflation rate (CPI this year - CPI last year/CPI last year) x 100%

"Change in quantity supplied"

A movement along a fixed S curve when P changes

"Change in demand"

A shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers)

In each scenario, determine the effects on the CPI and GDP deflator: A. Starbucks raises the price of frappuccinos B. Caterpillar raises the price of the industrial tractors it manufactures at it's Illinois factory C. Armani raises the price of the Italian jeans it sells in the US

A. The CPI and GDP deflator both rise B. The GDP deflator rises, the CPI does not C. The CPI rises, the GDP deflator does not

What will happen in the gasoline market now if buyers expect higher gasoline prices in the near future? A. The demand for gasoline will increase. B. The demand for gasoline will decrease. C. The demand for gasoline will be unaffected. D. The supply of gasoline will increase.

A. The demand for gasoline will increase.

For which of the following individuals would the opportunity cost of going to college be highest? A. a famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree B. a promising young mathematician who will command a high salary once she earns her college degree C. a student with average grades who has never held a job D. a student who is the best player on his college basketball team, but who lacks the skills necessary to play professional basketball

A. a famous, highly-paid actor who wants to take time away from show business to finish college and earn a degree

Suppose your management professor has been offered a corporate job with a 30 percent pay increase. He has decided to take the job. For him, the marginal A. benefit of leaving was greater than the marginal cost. B. cost of leaving was greater than the marginal benefit. C. benefit of teaching was greater than the marginal cost. D. All of the above are correct.

A. benefit of leaving was greater than the marginal cost.

Consider the market for new DVDs. If DVD players became cheaper, buyers expected DVD prices to fall next year, used DVDs became more expensive, and DVD production technology improved, then the equilibrium price of a new DVD would A. could rise, fall, or remain unchanged. B. fall. C. rise. D. stay the same.

A. could rise, fall, or remain unchanged.

The art in scientific thinking is A. deciding which assumptions to make. B. finding the right problem to study. C. not something in which economists have to be skilled. D. the ability to make an abstract subject easy to understand.

A. deciding which assumptions to make.

Which of the following concepts cannot be illustrated by the production possibilities frontier? A. equality B. trade-offs C. opportunity cost D. efficiency

A. equality

Exceptionally favorable growing conditions in the vineyards of Napa Valley would cause a(n) A. increase in the supply of wine, decreasing price. B. decrease in the demand for wine, decreasing price. C. decrease in the supply of wine, increasing price. D. increase in the demand for wine, increasing price.

A. increase in the supply of wine, decreasing price.

Maureen's college raises the cost of room and board per semester. This increase raises Maureen's opportunity cost of attending college A. only if the amount she would have to pay for room and board if she didn't attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost reduces Maureen's incentive to attend college. B. only if the amount she would have to pay for room and board if she didn't attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost increases Maureen's incentive to attend college. C. even if the amount she would have to pay for room and board if she didn't attend college rose by the same amount. An increase in opportunity cost reduces Maureen's incentive to attend college. D. even if the amount she would have to pay for room and board if she didn't attend college rose by the same amount. An increase in opportunity cost increases Maureen's incentive to attend college.

A. only if the amount she would have to pay for room and board if she didn't attend college rose by less than the increase in the amount her college charges. An increase in opportunity cost reduces Maureen's incentive to attend college.

Suppose roses are currently selling for $20 per dozen, but the equilibrium price of roses is $30 per dozen. We would expect a A. shortage to exist and the market price of roses to increase. B. surplus to exist and the market price of roses to increase. C. surplus to exist and the market price of roses to decrease. D. shortage to exist and the market price of roses to decrease.

A. shortage to exist and the market price of roses to increase.

A surplus exists in a market if A. the current price is above its equilibrium price. B. there is an excess demand for the good. C. quantity demanded exceeds quantity supplied. D. All of the above are correct.

A. the current price is above its equilibrium price.

How do you compare dollar figures from different times?

Amount in today's dollars = (Amount in year T dollars) x (Price level today/Price level in year T)

In which of the following cases should the United States produce more noodles than it wants for its own use and trade some of those noodles to Italy in exchange for wine? A. The opportunity cost of producing a gallon of wine is the same for Italy as it is for the United States. B. Italy has a comparative advantage over the United States in producing wine. C. Americans know less than Italians know about cooking noodles. D. The United States has an absolute advantage over Italy in producing noodles.

B. Italy has a comparative advantage over the United States in producing wine.

An increase in the price of blueberries would lead to a(n) A. increased supply of blueberries. B. a movement up and to the right along the supply curve for blueberries. C. a movement down and to the left along the supply curve for blueberries. D. Both a and b are correct.

B. a movement up and to the right along the supply curve for blueberries.

A model that shows how dollars flow through markets among households and firms is called the A. demand and supply diagram. B. circular-flow diagram. C. comparative advantage model. D. production possibilities frontier.

B. circular-flow diagram.

A movement upward and to the left along a demand curve is called a(n) A. increase in quantity demanded. B. decrease in quantity demanded. C. increase in demand. D. decrease in demand.

B. decrease in quantity demanded.

Which of the following would not result from all countries specializing according to the principle of comparative advantage? A. The size of the economic pie would increase. B. Worldwide production of goods and services would increase. C. Each country's production possibilities frontier would shift inward. D. The well-being of citizens in each country would be enhanced.

C. Each country's production possibilities frontier would shift inward.

The supply curve for stand up paddle boards A. shifts when the price of stand up paddle boards changes because the price of stand up paddle boards is measured on the vertical axis of the graph. B. does not shift when the price of stand up paddle boards changes because the price of stand up paddle boards is measured on the vertical axis of the graph. C. shifts when the price of stand up paddle boards changes because the quantity supplied of stand up paddle boards is measured on the horizontal axis of the graph. D. does not shift when the price of stand up paddle boards changes because the price of stand up paddle boards is measured on the horizontal axis of the graph.

B. does not shift when the price of stand up paddle boards changes because the price of stand up paddle boards is measured on the vertical axis of the graph.

For two individuals who engage in the same two productive activities, it is impossible for one of the two individuals to A. gain from trade with each other. B. have a comparative advantage in both activities. C. have an absolute advantage in both activities. D. be more productive per unit of time in both activities.

B. have a comparative advantage in both activities.

Elena loves orange juice. She reads in the newspaper that 20 percent of the Florida orange crop was destroyed by a late spring frost. Economists predict that the price of oranges will rise by 50 percent by the end of the year. As a result, Elena's demand for orange juice A. decreases as she looks for a substitute good. B. increases today. C. shifts left today. D. will increase but not until the end of the year.

B. increases today.

According to Adam Smith, the success of decentralized market economies is primarily due to A. society's legal system. B. individuals' pursuit of self-interest. C. the basic benevolence of society. D. partnerships that are forged between business and government.

B. individuals' pursuit of self-interest.

A model can be accurately described as a A. realistic and carefully constructed theory. B. simplification of reality. C. device that is useful only to the people who created it. D. theoretical abstraction with very little value.

B. simplification of reality.

A shortage exists in a market if A. there is an excess supply of the good. B. the current price is below its equilibrium price. C. quantity supplied exceeds quantity demanded. D. All of the above are correct.

B. the current price is below its equilibrium price.

Efficiency is illustrated by A. the circular-flow diagram only. B. the production possibilities frontier only. C. neither the production possibilities frontier nor the circular-flow diagram. D. both the production possibilities frontier and the circular-flow diagram.

B. the production possibilities frontier only

A production possibilities frontier is a straight line when A. the rate of tradeoff between the two goods being produced depends on how much of each good is being produced. B. the rate of tradeoff between the two goods being produced is constant. C. an economy is interdependent and engaged in trade instead of self-sufficient. D. the more resources the economy uses to produce one good, the fewer resources it has available to produce the other good.

B. the rate of tradeoff between the two goods being produced is constant.

Which of the following is not an example of scarcity? A. Each member of a household cannot get everything he or she wants. B. Every individual in society cannot attain the highest standard of living to which he or she might aspire. C. Miranda has an unlimited supply of oranges in her orchard. D. Only some people can afford to buy a BMW automobile.

C. Miranda has an unlimited supply of oranges in her orchard.

After much consideration, you have chosen Ireland over Spain for your Study Abroad program next year. However, the deadline for your final decision is still months away and you may reverse this decision. Which of the following events would prompt you to reverse this decision? A. The marginal cost of going to Spain increases. B. The marginal cost of going to Ireland decreases. C. The marginal benefit of going to Spain increases. D. The marginal benefit of going to Ireland increases.

C. The marginal benefit of going to Spain increases

Any point on a country's production possibilities frontier represents a combination of two goods that an economy A. will never be able to produce. B. may be able to produce in the future with more resources and/or superior technology. C. can produce using all available resources and technology. D. can produce using some portion, but not all, of its resources and technology.

C. can produce using all available resources and technology.

Candice is planning her activities for a hot summer day. She would like to go to the local swimming pool and see the latest blockbuster movie, but because she can only get tickets to the movie for the same time that the pool is open she can only choose one activity. This illustrates the basic principle that A. rational people think at the margin. B. people respond to incentives. C. people face tradeoffs. D. improvements in efficiency sometimes come at the expense of equality.

C. people face tradeoffs.

You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a rational consumer you should make your choice by comparing A. the benefits from eating all three bowls of ice cream to how much one more bowl of ice cream costs. B. the benefits from eating all three bowls of ice cream to how much three bowls of ice cream costs. C. the benefits from eating one more bowl of ice cream to how much three bowls of ice cream costs. D. the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream costs.

C. the benefits from eating one more bowl of ice cream to how much one more bowl of ice cream costs.

K/L=

Capital per worker

Components of GDP include

Consumption, Investment, Government Purchases, & Net Exports

Which of these statements about economic models is correct? A. For economists, economic models provide insights about the world. B. Economic models are often composed of equations and diagrams. C. Economic models are built with assumptions. D. All of the above are correct

D. All of the above are correct.

Suppose your college institutes a new policy requiring you to pay for a permit to park your car in a campus parking lot. A. The cost of the parking permit is not part of the opportunity cost of attending college under any circumstances. B. The cost of the parking permit is not part of the opportunity cost of attending college if you would not have to pay for parking otherwise. C. Only half of the cost of the parking permit is part of the opportunity cost of attending college. D. The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise.

D. The cost of the parking permit is part of the opportunity cost of attending college if you would not have to pay for parking otherwise.

Which of the following changes would not shift the demand curve for a good or service? A. a change in the price of a related good or service B. a change in income C. a change in expectations about the future price of the good or service D. a change in the price of the good or service

D. a change in the price of the good or service

An early frost in the vineyards of Napa Valley would cause a(n) A. increase in the supply of wine, decreasing price. B. decrease in the demand for wine, decreasing price. C. increase in the demand for wine, increasing price. D. decrease in the supply of wine, increasing price.

D. decrease in the supply of wine, increasing price.

A production possibilities frontier shifts outward when A. opportunity costs are lessened. B. the desires of the economy's citizens change. C. at least one of the basic principles of economics is violated. D. the economy experiences economic growth.

D. the economy experiences economic growth.

A rational decisionmaker takes an action if and only if A. the marginal cost of the action exceeds the marginal benefit of the action. B. the opportunity cost of the action is zero. C. the marginal cost of the action is zero. D. the marginal benefit of the action exceeds the marginal cost of the action.

D. the marginal benefit of the action exceeds the marginal cost of the action.

The bowed shape of the production possibilities frontier can be explained by the fact that A. economic growth is always occurring. B. the only way to get more of one good is to get less of the other. C. all resources are scarce. D. the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing.

D. the opportunity cost of one good in terms of the other depends on how much of each good the economy is producing.

Which of the following is not a determinant of the demand for a particular good? A. the prices of related goods B. income C. tastes D. the prices of the inputs used to produce the good

D. the prices of the inputs used to produce the good

Net Exports (NX)

Exports - Imports represents the foreign spending on the economy's goods and services

The knowledge and skills workers acquire through education, training, and experience is called

Human capital, denoted H

A dollar amount is _________ for inflation if it is automatically corrected for inflation by law or in a contract.

Indexed

A country's standard of living depends on

It's ability to produce goods and services (productivity)

The inputs into production that nature provides, e.g land, & mineral deposits, is called

Natural resources, denoted N

Y/L=

Productivity

L=

Quantity of labor

Y=

Real GDP

What is the main indicator of the average person's standard of living?

Real GDP per capita

Society's understanding of the best ways to produce goods and services is called

Technological knowledge

Surplus is

When quantity supplied is greater than quantity demanded

"Change in the quantity demanded"

a movement along a fixed D curve occurs when P changes

Quantity demanded of any good is the

amount of the good that buyers are willing and able to purchase

Quantity supplied for any good is the

amount that sellers are willing and able to sell

Two goods are substitutes if

an increase in price for one of them causes an increase in demand for the other (ex. hotdogs and hamburgers)

Two goods are complements if

an increase of one causes a fall in demand for the other (ex. coffee and sugar)

Factors of production

are inputs like labor, land, capital, and natural resources

Factor payments

are payments to the factors of production (ex. wages, rents)

Government Purchases (G)

is all spending on the g&s purchased by govt at the federal, state, & local levels (excludes transfer payments such as social security or unemployment services

In a circular-flow diagram, firms

buy/hire factors of production, use them to produce goods and services & sell goods and services

Consumption (C)

is total spending by households on g&s

When facing a surplus, sellers try to

increase sales by cutting price, reducing the surplus

GDP Deflator

is a measure of the overall measure of prices - 100 x (Nominal GDP/Real GDP)

The circular-flow diagram

is a simple depiction of the macroeconomy and illustrates GDP as spending, revenue, factor payments, and income

A demand schedule

is a table that shows the relationship between the price of a good and the quantity demanded

A supply schedule

is a table that shows the relationship between the price of a good and the quantity supplied

Suppose the price of music downloads falls

movement down along the curve, to a point with lower P (price) and higher Q (quantity of music downloads

Demand for an inferior good is

negatively related to income (an increase in income shifts D curve to the left)

In a circular-flow diagram, households

own the factors of production, sell/rent them to firms for income & buy and consume goods and services

The stock of equipment and structures used to produce goods and services is called

physical capital, denoted k

Demand for a normal good is

positively related to income (an increase in income shifts D curve to the right)

When facing a shortage, sellers try to

raise the price, reducing the shortage

"Change in supply"

shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs)

GDP includes

tangible (DVDs, mountain bikes, beer) & intangible goods (dry cleaning, concerts, cell phone service)

If the number of buyers increases, then

the D curve shifts to the right

Productivity is higher when

the average worker has more capital, human capital,natural resources per worker,

H/L=

the average worker's human capital

The law of demand

the claim that the quantity demanded of a good FALLS when the price of a good RISES, other things equal

Demand curve shifters include

the number of buyers, income, prices of related goods, tastes & expectations

The equilibrium price is

the price that equates quantity supplied with quantity demanded

What does GDP not value?

the quality of the environment, leisure time, non-market activity (such as child care provided at home), and an equitable distribution of income

The equilibrium quantity is

the quantity supplied and demanded at the equilibrium price

GDP measures

the total income of everyone in the economy

Investment (I)

the total spending on goods that will be used in the future to produce more goods includes spending on capital equipment, structures, & inventories

Nominal GDP

values output using current prices and is not corrected for inflation

Real GDP

values output using the prices of a base year and is corrected for inflation

Shortage is

when quantity demanded is greater than quantity supplied