2.03 Macro-U2: Exam: Units 1 and 2

Use the following to answer this question and next question: The descriptions give the responses of four individuals to a Bureau of Labor Statistics (BLS) survey of employment. 1. Mollie just graduated from college and is now looking for work. She has had three job interviews in the past month. 2. George works in an automotive assembly plant. He was laid off six months ago as the economy weakened. He expects to return to work in several months when national economic conditions improve. 3. Jeanette worked as an aircraft design engineer for a company that produces military aircraft until she lost her job last year when the Federal government cut defense spending. She has been looking for similar work for a year but no company seems interested in her aircraft design skills. 4. Ricardo lost his job last year when his company downsized and laid off middle-level managers. He tried to find another job for a year, but was unsuccessful and quit looking for work. Refer to the above information. Which individual is structurally unemployed?

3

Answer the question(s) based on the following data, using year 1 as the base year. All dollars are in billions. Refer to the data. From year 3 to year 4, prices rose by approximately:

3.7 percent

Refer to the above information. Which individual would be classified as a discouraged worker?

4

You read the following information about the economy: Real GDP up three percent from a year ago. Unemployment rate of 6.1 percent. Consumer Price Index up six percent from a year ago. Index of Leading Indicators up for the last six months. Prime interest rate of ten percent, up from seven percent a year ago. a. Explain what each of these economic indicators measures and what the significance of the current data is for the economy. b. These indicators should paint a picture of the entire economy. Describe that picture.

Correct a. Real GDP: Measures the growth of the economy by counting the total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports adjusted for inflation. Three percent growth in a year is good Unemployment is the number of unemployed people divided by the total size of the labor force, expressed as a percentage. People who are jobless, looking for jobs, and available to work are considered unemployed. The labor force is defined as people who are either employed or unemployed. An unemployment rate of 6.1 percent is a little high, indicating that the economy has room to grow. It shows the economy may be slowing. CPI measures the change in the cost of a fixed basket of products and services, including housing, electricity, food, and transportation. Six percent is a substantial rate, indicating significant inflationary pressure. The index of leading economic indicators (LEI) is a composite of the following 11 leading indicators: Average workweek (manufacturing) Initial unemployment claims New orders for consumer goods Vendor performance Plant and equipment orders Building permits Change in unfilled durable orders Sensitive material prices Stock prices (S&P 500) Real M2 Index of consumer expectations Leading indicators react ahead of the change in the economy. Six months of increase indicates the economy is heading in the direction of growth. Prime interest rate is the interest rate that commercial banks charge their most creditworthy borrowers, such as large corporations. The prime rate is a lagging indicator. An increase would indicate an attempt to slow the economy -- inflation. b. According to these indicators, this economy is doing very well and is experiencing upward growth. The increasing inflation is being properly curbed by the federal government.

True, false, or uncertain, and why? "If you won a million dollars in the lottery, you wouldn't have the economic problem of scarcity."

Scarcity is limited resources and unlimited wants. Money is one resource. Even if the winnings were enough money for life, there is still a scarcity of time, and other resources.

An example of an intermediate good or service would be:

a desk bought by an accountant for her office.

Net exports is a negative number when:

a nation's imports of goods and services are greater than its exports.

The following headline appeared in 1986: "Inflation Rate at 1.1%; Lowest Rate in 2 Decades." a. What is meant by inflation ? b. How did the statisticians arrive at 1.1 percent? What measure did they probably use? c. What does this headline imply about inflation during the 20 years before 1986?

a. Inflation is a general increase in price levels. b. The price of a market basket of goods is compared on a monthly basis. The percent change is determined by dividing the change in price of the market basket by the price of last month's market basket. c. The previous twenty years were highly inflationary.

GDP is the market value of:

all final goods and services produced in an economy in a given year.

In product markets:

businesses sell goods and services to households.

Refer to the graph showing the market supply and demand for a product. A change in equilibrium price and output from point a to point b would most likely be caused by a(n):

decrease in prices of substitutes.

A headline reads "Lumber Prices Up Sharply." In a competitive market, this situation would lead to a(n):

increase in the price of new homes and decrease in quantity.

An increase in demand for oil and an increase in supply of oil will:

increase quantity, but whether it increases price depends on how much each curve shifts.

When a society underallocates resources to the production of a good or service, it indicates that the:

marginal benefit is greater than the marginal cost.

The GDP deflator or price index equals:

nominal GDP divided by real GDP.

The opportunity cost of a new public highway is the:

other goods and services that must be sacrificed to construct the new highway.

The scalping of tickets for an event is a sign that at the stated price on the ticket, the:

quantity demanded is greater than quantity supplied.

Which phase of the business cycle would be most closely associated with an economic contraction?

recession

Increases in resources or improvements in technology will tend to cause a society's production possibilities curve to:

shift outward or to the right.

If an economy is operating at a point inside the production possibilities curve, it indicates that:

society's resources are being poorly utilized.

A distinguishing characteristic of public transfer payments is that:

the recipients make no contribution to current production in return for them.

GDP tends to underestimate the productive activity in the economy because it excludes the value of output from:

the underground economy.

What combination of changes would most likely decrease the equilibrium quantity?

when demand decreases and supply decreases

In what circumstances would lenders most benefit?

when there is an unanticipated decrease in inflation

GDP understates the amount of economic activity in the United States because it excludes

work performed by people on their own homes. Correct Answer: Correct work performed by people on their own homes.