ECO Exam 2 Review

Providing high-quality public education will:

increase a country's stock of human capital

Human capital contributes to growth because it helps workers in the economy:

produce more with the same amount of physical capital, work longer hours, and capture a larger share of company profits

Natural resources are:

production inputs that come from the earth

Consider the information for the three countries in the table below. Country | Income per capita ($) | Real per capita GDP growth rate (%) Ansonia | 5,000 | 7.0 Trumbull | 7,500 | 4.5 Shelton | 10,000 | 2.0 These countries ___ converge to the same level of economic development given enough time.

will

Which of the following is an example of a natural resource?

Yosemite National Park

Trees are:

a renewable resource

Which of the items below would likely cause wage levels to be above labor market equilibrium levels?

- Workers for a large national retailer become unionized - A large employer in the region significantly increases its wage rates to reduce the turnover of its workers

Taxpayers are clamoring for their government to be more responsible and many strongly support a balanced-budget amendment. This would mean the country could no longer spend more than it takes in each year. A balanced-budget amendment will:

- force the government to cut back on its spending - limit the flexibility of the government in engaging in expansionary fiscal policy - reduce the cost of borrowing

Which of the following is an example of a nonrenewable resource?

Natural gas

Suppose labor's share of output is 60% and capital's share of output is 40%. If labor grows at a rate of 5%, then this will cause output to grow at a rate of ___%. If capital grows at a rate of 5%, then this will cause output to grow at a rate of ___%. Explanation: According to the growth accounting equation, the growth rate of output is equal to the growth rate of labor times labor's share of output plus the growth rate of capital times capital's share of output plus the growth rate of technology. The impact on output of the growth in labor is 0.05 × 0.60 = 0.03, or the 5% growth in labor leads to 3% growth in output. The impact of the growth in capital is 0.05 × 0.40 = 0.02, or the 5% growth in capital leads to 2% growth in output.

3; 2

What is another name for the "equilibrium rate of unemployment?"

The natural rate of unemployment

calculate unemployment rate

unemployed/labor force x 100

Classical unemployment can be caused by:

union bargaining, efficiency wages, and minimum wage laws

calculate real GDP per capita growth rate

Real GDP per capita growth rate = Nominal GDP growth rate - Inflation rate - Population growth rate

A country can acquire more physical capital if it:

forgoes current consumption

The amount of physical capital in an economy is calculated by adding up the value of all:

tools, equipment, and structures

CHAPTER 12 HW

AGGREGATE DEMAND AND SUPPLY

CHAPTER 12 QUIZ

AGGREGATE DEMAND AND SUPPLY

We would expect, all else equal, that _______ on wage income would _______ unemployment.

lower taxes; reduce

After an economic slowdown, the new equilibrium wage will be _______ because the labor demand curve shifts to the _______.

lower; left

During a recession, unemployment is:

more common

Higher interest rates occur at higher price levels, which explains the _______ relationship between the price level and investment spending.

negative

Inflation reduces the real value of nominal GDP per capita because:

nominal GDP is calculated based on goods and services valued at current prices

Suppose the BLS announces that price levels throughout the economy have increased. What response would we expect to see in the AD/AS model?

NONE OF THE FOLLOWING ARE TRUE: - The long-run aggregate supply curve would shift to the left. - The short-run aggregate supply curve would shift to the left. - The aggregate demand curve would shift to the left.

One of the main benefits of government debt is:

the flexibility to respond to unexpected crises

As a recession drags on for an extended period of time:

the labor force participation rate will fall. Workers who have been cyclically unemployed for a long period of time begin to see their skills deteriorate and may move from cyclically unemployed to structurally unemployed.

In the long run, a drought that destroys most of a summer's wheat crops would cause permanently:

NONE OF THE FOLLOWING ARE TRUE: - lower output. - higher prices. - lower prices.

calculate real GDP per capita

Real GDP per capita = Real GDP/Population

Innovation often requires "creative destruction," in which a new product or technology makes previous products or technologies obsolete. For example, typewriters became useless when personal computers were invented. Hence, the personal computer "destroyed" the typewriter. This process of creative destruction often results in structural unemployment because workers who knew how to build and maintain the old products have skills that are no longer in demand. What is the government's role in limiting how often new products are created or in helping those workers who are displaced because of the new product?

The government shouldn't limit how often new products are introduced. Technological changes will always result in winners and losers, so helping those workers who are displaced because of the new product is a normative issue

Innovation often requires "creative destruction," in which a new product or technology makes previous products or technologies obsolete. For example, typewriters became useless when personal computers were invented. Hence, the personal computer "destroyed" the typewriter. This process of creative destruction often results in structural unemployment because workers who knew how to build and maintain the old products have skills that are no longer in demand. What is the government's role in limiting how often new products are created or in helping those workers who are displaced because of the new product?

The government shouldn't limit how often new products are introduced. Technological changes will always result in winners and losers, so helping those workers who are displaced because of the new product is a normative issue.

The labor force does not include people in the working-age population who are:

retired, a full-time student, or a stay-at-home parent

Rising business optimism and confidence will cause a: Falling business optimism and confidence will cause a:

rightward shift of the aggregate demand curve leftward shift of the aggregate demand curve

A minimum wage is:

the lowest wage a firm is legally allowed to pay its workers

A country's income:

depends upon how productive its workers are

Protecting property rights:

encourages people to invest in capital

If the government decides not to respond to a negative supply shock, the economy will:

experience stagflation

In France, labor laws have typically made it very difficult (or even illegal) for firms to fire workers during economic downturns. These laws would cause cyclical unemployment to:

fall, but frictional and structural unemployment will rise because it is riskier to hire workers

Government decisions about the level of taxation and public spending are called:

fiscal policy

Increased government spending after a negative supply shock can cause:

further increases in the price level

In general, the role of unions in the United States labor market:

has decreased since the 1950s

Suppose the marginal propensity to consume is 0.80. The impact on GDP of a one-dollar increase in government spending is $___. The impact on GDP of a one-dollar decrease in taxes is $___.

5; 4

In 2018, the labor force participation rate was 63.1 percent. This means that:

63.1 percent of all working-age people wanted a job

If a country devotes its resources to acquiring more physical capital, it will:

decrease its current consumption, increase its productivity, and decrease its output per person in the short-term

Which of the following would likely cause the aggregate demand curve to shift to the right?

decreased corporate income taxes

Suppose there is a decrease in government spending. In the short run output ___ and in the long run output ___.

decreases; does not change

Sonia has a BA in art history and is currently working full-time as a waitress. The BLS would classify Sonia as:

employed

The trade-off between current consumption and investment in the capital and research that contributes to economic growth and higher future income:

is more severe for poor countries due to increased opportunity cost

calculate labor force participation rate

labor force/working age population x 100

Long-run economic growth is generally positive rather than negative because long-run changes in output are driven by changes in:

labor, capital, and technology

National output per person is another way to report:

real GDP per capita

The difficulty policy makers face in defining the duration and amount of unemployment benefits is balancing ___ against ___.

relieving individual economic hardship; creating disincentives to look for work

When a supply-side shock is assumed to be temporary:

the SRAS curve shifts

impact on GDP of a one-dollar increase or decrease

1/(1-MPC)

According to the rule of 70, if a country grows at 7 percent per year, it will double its real GDP per capita in:

10 years

Even though the economies of emerging countries such as ___ are growing at a very fast rate, ___ reach the same level of GDP per capita as developed countries such as ___ because the developed countries ___.

India; it may take some time before they; Norway; are starting at a much higher level

CHAPTER 10 HW

ECONOMIC GROWTH

CHAPTER 10 QUIZ

ECONOMIC GROWTH

Which of the following items would likely contribute to the current government budget deficit?

Involvement in a war, an increase in the rate of unemployment, and a tax cut

CHAPTER 9 HW

UNEMPLOYMENT AND LABOR MARKET

Which component of GDP is not correlated with the price level?

Government spending

CHAPTER 13 HW

FISCAL POLICY

During a recession, analysts at the CBO project that the economy is operating $1.5 trillion below potential output. Assuming the MPC is 0.8, by how much would the government have to increase spending to restore potential output?

$300 billion

Using the growth accounting equation, a country finds that half of its growth in output comes from growth in technology. Which of the following help explain the growth in technology?

- A greater percentage of the workforce has a college degree. - Most companies decide to upgrade their computer systems. - Farmers adopt new seed varieties that increase yields. - Firms adopt new management techniques that allow them to increase profit.

CHAPTER 13 QUIZ

FISCAL POLICY

Which of the following is an example of human capital?

Your ability to use Google

If unemployment is high and spending is sluggish, what type of fiscal policy should be enacted?

Expansionary fiscal policy, which includes increases in government spending or decreases in taxes, which will shift AD to the right

Consider the difference between a one-year drought and permanent climate change that causes a drier climate on the aggregate demand and aggregate supply model. Which of the following statements is true?

A one-year drought shifts the SRAS to the left, raising prices and reducing output; permanent climate change makes producing food harder, shifting both the LRAS and SRAS to the left, permanently lowering output and raising prices

Suppose the National Bureau of Economic Research (NBER) comes out with a report suggesting that the economy will soon dip into recession. You can expect that:

- Levels of structural unemployment are not likely to change much - Levels of frictional unemployment may rise as people looking for jobs will find it harder to get new jobs - The labor force participation rate is likely to fall as potential workers drop out of the job market - Levels of cyclical unemployment will rise

Suppose a country is in the midst of a serious recession with high unemployment and large government deficits. The president suggests that in times like this the government has the obligation to "tighten its belt" and cut spending since so many families around the country have to do the same thing. In this case, a decrease in government spending will:

- eventually cause a rightward shift of SRAS - decrease the price level and costs - push AD to the left and decrease output

A "supply-side" recession (i.e., a recession caused by a fall in aggregate supply) could be caused by:

- migration - significant increases in corporate taxes - famine - large increases in oil or food prices - war

Over the last few centuries:

- nominal GDP grew faster than inflation - economic growth exceeded population growth - nominal GDP grew faster than population.

If an economy is in a recession, it means that:

- total output is less than potential output - the economy is not in long-run equilibrium - the short-run equilibrium lies to the left of the long-run aggregate supply curve

Human capital is generally acquired through: I. education. II. job training. III. job experience.

I, II, and III

A policy of attracting Foreign Direct Investment is always an effective approach to promoting economic growth.

False

If the official unemployment rate decreases two or three months in a row, then it is a sure sign of improvement in the economy.

False

The natural rate of unemployment tends to increase during a recession.

False

All else equal, at a young age, would you rather have a large level of savings or a pool of savings that was increasing at a faster rate?

It depends—if the growth rate on the pool of savings is enough higher than the growth rate on the large level of savings, then over a long period of time the small pool of savings will have a greater value

Any expenditure that adds to a government budget deficit would always also add to the public debt.

True

CHAPTER 9 QUIZ

UNEMPLOYMENT AND LABOR MARKET

A phenomenon known as Moore's law says that:

computing capacity doubles every two years

A government official observes that there has been a long-run increase in the price level but no change in the level of potential output. This could have been caused by:

a positive demand shock that increased production in the short run

If a country has a high level of economic growth, it must have:

a rapidly increasing GDP per capita

Which component of GDP will be affected if the government decreases the income tax rate?

consumption

For each of the following situations, use the AD/AS model to describe what happens to the price level and output in the United States in the short run. In each case, assume the economy starts in long-run equilibrium, and describe the appropriate shift in the AS or AD curve. a. A stock market crash reduces people's wealth. b. The spread of democracy around the world increases consumer confidence in the United States. c. The European economy crashes. d. The United States enters into an arms race with China, resulting in a significant increase in military spending. e. A revolution in Iran results in a significant reduction in the world's supply of oil. f. Terrorist activities temporarily halt the ability of Americans to engage in certain productive activities such as transportation and finance. g. Intel develops a new computer chip that is faster and cheaper than previous chips. h. A summer of perfect weather in the Midwest leads to record harvests of corn, wheat, and soybeans.

a. A stock market crash reduces wealth and therefore consumption spending, shifting the AD curve to the left. Output falls and the price level falls. b. A rise in consumer confidence increases consumption spending, shifting the AD curve to the right. Output rises and the price level rises. c. A crash in the European economy reduces their consumption spending, and therefore reduces our exports, shifting the AD curve to the left. Output falls and the price level falls. d. An arms race increases government spending, shifting the AD curve to the right. Output rises and the price level rises. e. A reduction in the world's supply of oil increases oil prices and therefore production costs, shifting the AS curve to the left. Output falls and the price level rises. f. If terrorist activities disrupt the transportation of goods and services and financial market activity, there is a temporary reduction in firms' ability to produce goods and services, so the AS curve shifts to the left. Output falls and there is an increase in the price level. g. The new chip is an example of an increase in technology that will increase production, shifting the AS curve to the right. Output rises and the price level will fall. h. The perfect weather is an example of a temporary increase in production. This will shift the AS curve to the right. Output rises and there is a decrease in the price level.

The slope of the short-run aggregate supply curve indicates that:

as overall price levels increase, firms are willing to produce more

The natural rate of unemployment is the normal level of unemployment:

in an economy in the long run

Indicate whether each of the following statements is true or false. a. Country A's labor share is 60%, Country B's labor share is 70%, and labor is growing at a rate of 3% in both countries. Assuming capital and technology are not growing in either country, Country B has a higher growth rate of output. ___ b. Country A's labor share is 40%, Country B's labor share is 70%, and labor is growing at a rate of 10% in country A and 6% in country B. Assuming capital and technology are not growing in either country, Country A has a higher growth rate of output. ___ c. Labor is growing at a negative rate in country A and a positive rate in country B, so country B must have a higher growth rate of output. ___ d. Labor and capital are both growing more quickly in Country A than in Country B, so Country A must have a higher growth rate of output. ___

True False False False

Classify each of the following situations as either frictional, structural, or cyclical unemployment. a. Maria has started looking for work after taking time off to have a baby. b. Juan left high school without graduating and can't find any jobs he is qualified for. c. Rohit had a job working on Wall Street but lost his job during the financial crisis. d. Adam has just arrived in a new city and is looking for work. e. Max wants to work as an air steward, but because the airline industry is heavily unionized there are very few jobs available. f. Jada has just lost her job in a web startup that was affected by a downturn in the economy.

a. Frictional unemployment: Returning from work after childbirth is a natural life change. b. Structural unemployment: Juan lacks the skills to engage in productive work. c. Cyclical unemployment: The financial crisis is a temporary economic downturn. d. Frictional unemployment: Changing cities is a natural life change. e. Structural unemployment: Unions alter the demand structure for labor in the airline industry. f. Cyclical unemployment: Her job was lost due to a temporary economic downturn.

a. Which of the following statements is true? b. Sticky wages and sticky prices explain the upward-sloping short-run aggregate supply curve because: c. The long-run aggregate supply curve is vertical because:

a. Sticky wages are contracts that keep wages fixed between businesses and workers, while sticky prices are contracts that keep prices fixed between businesses and their suppliers b. as the prices of a firm's products rise, they are willing to supply more if their input costs are not rising at the same time c. wages and prices are only sticky in the short run, not in the long run

a. Unemployment compensation is an important automatic stabilizer for the economy. True or False? b. If the amount of time a person is eligible for unemployment compensation is reduced from 26 weeks to 4 weeks, people will have an incentive to quickly find a new job. True or False?

a. True b. True

What is the relationship between the price level and the following components of aggregate demand. a. There is ___ relationship between the price level and consumption. b. There is ___ relationship between the price level and investment. c. There is ___ relationship between the price level and government spending. d. There is ___ relationship between the price level and net exports.

a. a negative b. a negative c. no d. a negative

You hear on the nightly news that the president has vowed to decrease the nation's debt. "Both the government and private citizens will have to buckle down and learn to do without," he says. a. In order to reduce its debt, a nation must: b. Debt reduction will result in:

a. run surpluses b. fewer public works projects, lower transfer payments, and less money available for households to spend

Say whether the following statements are true or false. a. In the long run, prices don't affect output: ___ b. In the short run, prices may affect output: ___

a. true b. true

Factories owned by U.S. firms on the Mexican side of the U.S.-Mexico border are:

an important source of foreign direct investment in Mexico

Which of the following will not increase LRAS?

an increase in the price level

When empirical evidence is applied to convergence theory, the results:

are mixed

Economic growth means:

more goods and services are produced

When policy-makers discuss policies that encourage long-run growth in per capita real GDP, they often mention policies aimed at reducing the growth rate in the population. If effective, these policies could improve long-run growth because a smaller population increases: However, these policies can:

per capita real GDP for a given level of real GDP reduce nominal GDP at the same time and may be coercive

Convergence theory proposes that:

poorer countries will grow faster than rich ones