EC 309 Exam 1
A product that is produced by a firm in 2015 and not sold to a consumer until 2016 will add to GDP in _________ under _________. A - 2015; inventory investment B - 2015; consumption expenditure C - 2016; inventory investment D - none of the above
A - 2015; inventory investment GDP measures all goods produced, even ones that are not sold. Since this product was produced in 2015, it will be included in the 2015 GDP. It will land under inventory investment as opposed to consumption expenditure b/c it was not bought/consumed and remained in inventory
If disposable income is 4,000, consumption is 3,500, government purchases is 1,000, and taxes are 800, national saving is equal to: A - 300 B - 500 C - 700 D - 1000
A - 300 Disposable income = Y - T Add T back to disposable income to find Y (4000 + 800 = 4800) National Saving = Y - C - G 4800 - 3500 - 1000 = 300
An increase in the price of imported cars will show up in: A - neither CPI or GDP deflator B - both the CPI and GDP deflator C - CPI but not the GDP deflator D - GDP deflator but not the CPI
C - CPI but not the GDP deflator Since the car is imported, the GDP deflator will not be affected by it because the car was not produced domestically and GDP only deals with products that are produced domestically. Therefore it will show up in the CPI but not the GDP deflator
Real GDP is a better measure of economic well-being than nominal GDP because real GDP: A - includes the value of government transfer payments B - adjusts the value of goods and services produced for changes in the foreign exchange rate C - measures changes in the quantity of goods and services produced by holding prices constant D - excludes the value of goods and services exported abroad
C - measures changes in the quantity of goods and services produced by holding prices constant. Real GDP accounts for inflation, which is measured by comparing the current prices of goods to prices of goods in a base year, where the price is held constant.
Which of the following is (are) included in government transfer payments? A - Government spending on new computers B - the wages of of government employees C - unemployment benefits D - All of the above
C - unemployment benefits The government transfers dollars from taxpayers and then writes checks to the unemployed. The government did not spend money unlike A or B, they transferred taxpayer money therefore it is included in transfer payments
CPI vs GDP deflator: basket of goods
CPI - fixed GDP Deflator - changes every year
When prices of different goods are increasing by different amounts, the price index that will rise the fastest is: A - PCE index B - implicit price index C - GDP deflator D - CPI
D - CPI The GDP and PCE deflators change every year but this is not the case for the CPI. Since CPI uses fixed quantities in its calculations, prices change much quicker when using the CPI
With a Cobb-Douglas production function, the share of output going to labor: A - decreases as the amount of labor increases B - increases as the amount of capital increases C - increases as the amount of labor increases D - does not depend on the amount of labor in the economy
D - does not depend on the amount of labor in the economy Cobb-Douglas functions have fixed factor income shares so L and K remain the same. Even of the labor in the economy increases or decreases, the share of output going to labor will NOT be affected since its fixed
According to the neoclassical theory of distribution, in an economy described by a Cobb-Douglas production function, workers should experience high rates of real wage growth when: A - capital stock is growing slowly B - labor force is growing rapidly C - labor productivity is growing slowly D - marginal labor productivity is growing rapidly
D - marginal labor productivity is growing rapidly real wages (w/p) and marginal productivity of labor (MPL) have a positive relationship (w/p = MPL), so when MPL rises so will real wages
Substitution Bias (CPI)
The CPI uses fixed weights, so it cannot reflect consumers' ability to substitute toward goods whose relative prices have fallen.
inventory investment
The change in the value of all firms' inventories
National saving
Y - C - G
If Y = 100K^0.3 L^0.7, what is the ratio of capital to labor income share?
capital to income share = (alpha/1 - alpha) = 0.3/0.7 = 3/7
CPI vs GDP deflator: prices of imported consumer goods
included in CPI, excluded from GDP deflator
On the loanable funds market diagram, what goes on the Y axis?
r* - equilibrium interest rate
how do you calculate the equilibrium interest rate?
set national saving equal to I (investments)
residential fixed investment
spending by consumers and landlords on housing units
business fixed investment
spending on plant and equipment
Personal Consumption Expenditures (PCE) Deflator
the ratio of nominal to real consumer spending
If the base year is 2018 and you want to calculate the real GDP for 2019, which years' prices do you use?
use 2018 prices with 2019 quantities - ALWAYS use base year prices with real GDP
If the base year is 2021 and you want to calculate the CPI for 2022, which years quantities do you use?
use 2021 quantities with 2022 prices - ALWAYS use base year quantities
what is the value added approach when calculating GDP?
value of output - value of intermediate goods used to produce that output
In a Cobb-Douglas production function, the marginal product of labor will increase if: A - the quantity of capital increase B - average labor productivity decreases C - capital's share of output increases D - the quantity of labor increases
A - The quantity of capital increases. Marginal product of labor (MPL) has an inverse relationship with quantity of labor (L). Assuming capital is held constant, more labor/workers using the same amount of machines will decrease the marginal product produced by each worker. For MPL to increase, an increase in quantity of capital is necessary. More machines with the same amount of workers means the marginal product for each worker will rise. Capital (K) and marginal product of capital (MPK) also have a similar inverse relationship
The salary received by a U.S. citizen who works in China counts toward: A - U.S. GNP B - both U.S. GNP & GDP C - U.S. GDP D - Chinese GNP E - both Chinese GNP & GDP
A - U.S. GNP GDP is dependent on location, while GNP is dependent on nationality. A U.S. citizen working in China would contribute to U.S. GNP due to having American citizenship and would also contribute to Chinese GDP since they work in China. Since U.S. GNP & Chinese GDP is not an answer choice, A is the correct answer
If immigration increases the labor force in an economy with a Cobb-Douglas production function, the marginal product of labor _________ and the marginal product of capital ____________. A - decreases; increases B - decreases; decreases C - increases; increases D - increases; decreases
A - decreases; increases Referring back to question 1, L and MPL have an inverse relationship. If immigration causes L to increase, MPL will decrease. Additionally, L and MPK have a positive relationship. Assuming capital is held constant, more labor will increase the marginal productivity of capital so the correct choice is A
In the face of rising oil prices, the overall inflation rate will be _________________ the core rate of inflation A - higher than B - lower than C - equal to D - all of the above are equally likely
A - higher than The core inflation rate measures changes in prices NOT including food and energy prices due to their high volatility. If oil prices are rising which will in turn cause higher inflation, the overall inflation rate will be higher than the core rate because it would not include rising oil prices (energy).
All of the following actions are investments in the sense of the term used by macroeconomists except: A - John Smith buying a newly constructed home B - Sandra Santiago buying 100 shares of Apple stock C - a corner candy store buying a new computer D - Apple building a new factory
B - Sandra Santiago buying 100 shares of Apple stock In economics, financial investments like buying stocks or bonds are NOT considered economic investments. Investing in a new home, new computer or new factory would be considered part of the investment category
Endogenous variables are: A - fixed at the moment they enter the model B - determined within the model C - the inputs of the model D - from outside the model
B - determined within the model Exogenous variables are determined outside the model, and endogenous variables are determined inside the model
Private saving
Sp = Y - T - C
How would an increase in capital (with fixed labor) affect real wage and real rental price?
If capital (K) increases marginal productivity of labor (MPL) increases, but marginal productivity of capital (MPK) decreases MPK = R/P (real rental price) so if MPK decreases, real rental price decreases MPL = W/P (real wages) so if MPL increases, real wages increases
CPI vs GDP Deflator: prices of capital goods
Included in GDP deflator (if produced domestically) Excluded from CPI
supply side factors
K (capital), L (labor), A (production technology)
GDP Delfator Formula
Nominal GDP/Real GDP * 100
Public saving
Sg = T - G
On the loanable funds market diagram, what goes on the X axis?
national saving
