econ 1a exam 2 and ch 6,7,8

To compute GDP, you must add up the total value of all final goods and services produced by a country's citizens in a given year. True Correct False

False

If the CPI increased from an index value of 87 in 1992 to an index value of 95 in 1993, the rate of inflation in that period is: A. 9.2% B. 11.0% C. 12.6% D. 13.5%

A A rise in the prices that makes up the market basket of goods and services is calculated as the change in the price index divided by the price index in the previous year multiplied by 100 [(95-87)/87]X100=9.2%

National Income is: A. a measure of household and business earnings from the sale of factors of production or productive resources. B. a measure of the market value of total output. C. a measure of income households have available to spend before paying personal taxes. D. a measure of income households have available after they make their mortgage and car payments, plus take the kids to McDonald's.

A By definition, National Income is the total income earned by citizens and businesses in a country.

According to the Classical view of business cycles: A. it would be strange if fluctuations did not occur when individuals are free to decide what they want to do. B. expansions and contractions are symptoms of underlying problems in the economy. C. fluctuations in economic activity can and should be controlled. D. individuals will anticipate Government's reaction to a fluctuation and work with Government to smooth out the fluctuation.

A Classicals generally favor laissez-faire or non-activist policies, and generally view business cycles as something quite normal, especially when people are out in the market freely choosing what they want to do.

Classicals would agree that usually: A. all unemployment can be generally attributed to frictional unemployment. B. frictional unemployment is only a small part of total unemployment. C. structural and cyclical unemployment are more common than frictional unemployment. D. society owes a person a job commensurate with his or her training.

A Classicals tend to see unemployment as an individual choice and thus most unemployment is frictional.

If substantially more foreign money is invested in Mexico than Mexican citizens have invested abroad in other countries, then one will likely expect: A. Mexican GDP to exceed Mexican GNP. B. Mexican net foreign factor income to be positive. C. Mexican net foreign factor income to be zero. D. Mexican GNP to exceed Mexican GDP.

A Net foreign factor income is foreign income of one's citizens minus the income of residents who are not citizens. If more foreign money is invested in Mexico than Mexican citizens have invested abroad, it is likely that income of residents who are not citizens of Mexico will exceed foreign income of Mexican citizens. That is net foreign factor income will be negative and GDP will exceed GNP in Mexico.

"Business cycle" is the term used to describe: A. the fluctuations in aggregate production that occur in an economy over time. B. the length of time required for a firm to purchase its inputs, produce its output, and generate sales revenue. C. the pattern of increases and decreases in the money supply. D. the phases of development from an agrarian economy to an industrialized economy.

A Please see the definition of business cycles in the text and in lecture.

Which of the following is NOT included in our calculation of GDP? A. The value of products sold during the current year but produced during the previous year. B. The value of a haircut given in the current year. C. The value of a new car produced and purchased during the current year. D. The value of new houses built and ready for sale during the current year, but have yet to sell.

A Products are counted the year they are produced. In the year these are sold, inventory investment falls by the amount of the sale to consumers or final demanders. In this case, goods that were produced in previous years would have been counted as part of GDP in those previous years, whether they were sold or not. Remember, GDP is a measure of final output and income, not a measure of transactions or sales. When the good was produced, rather than sold, is what and when it is added to GDP.

Which type of unemployment is most likely the result of major changes in technology in the economy, making some skills and tasks obsolete? A. Structural unemployment. B. Frictional unemployment. C. Cyclical unemployment. D. Seasonal unemployment.

A Structural unemployment is unemployment caused by economic restructuring making some skills or tasks obsolete. As such, generally technological changes cause structural unemployment to occur, although there may be some frictional and/or cyclical unemployment that may occur as well, but mainly structural.

In 1969, the CPI was 37 (1982-84 = 100), and in 1989 it was 124. Therefore, the price level from 1969 to 1989 rose: A. 35% B. 87% C. 135% D. 235%

A rise in the price level (inflation) is calculated as the change in the price index divided by the price index in the previous year multiplied by 100. Therefore our calculation is: [(124-37)/37]X100= 235%

If the potential labor force is 120 million and the number of people who are looking for jobs but cannot find them is 6 million, the unemployment rate is: Correct A. 5% B. 6% C. 12% D. 20%

A. 5%

Which of the following would not increase this year's U.S. GDP? Correct A. Volunteer services at the local homeless shelter this year. B. A commission charged by your broker when you sold 100 shares of IBM stock. C. The final sales of a U.S. corporation here in the U.S. this year. D. The value of a doctor's services to his or her patients this year.

A. Volunteer services at the local homeless shelter this year.

Suppose that both real GDP and the general price level in the economy double. We can conclude that nominal GDP: Correct A. more than doubled. B. doubled. C. increased, but less than double. D. did not increase at all.

A. more than doubled.

According to what we have learned, if specialization and the division of labor increase, productivity and efficiency: Correct A. will increase. B. will decrease. C. are not likely to change. D. are completely irrelevant to the issue of specialization and division of labor.

A. will increase.

According to the Keynesian view of business cycles: A. it would be strange if fluctuations did not occur when individuals are free to decide what they want to do. B. expansions and contractions are symptoms of underlying problems in the economy. C. fluctuations cannot be controlled by Government. D. individuals will anticipate and undermine Government's reaction to a fluctuation.

B Keynesians generally favor activist government policies and see fluctuations as a problem.

National Income is comprised of: A. employee compensation, interest, and rent only. B. employee compensation, interest, rent, and profits. C. employee compensation, interest, rent, profits and transfer payments. D. employee compensation, interest, rent and profits minus business taxes.

B National Income is the sum of employee compensation, interest, rent and profits.

Gross Domestic Product measures: A. the sum of coins, bills, and demand deposits in an economy. B. the market value of an economy's production of final goods and services in a one year period. C. the total expenditures of the federal government over the period of one year. D. the market value of an economy's total production of all goods and services, both intermediate and final, in a one year period.

B Please see the definition of GDP in the text and in lecture.

The CPI is based on: A. all goods and services produced for consumption in the economy. B. the basket of goods and services purchased by a typical household. C. the basket of goods and services purchased by the poorest households. D. the basket of goods and services purchased by the wealthiest households.

B Please see the definition of the CPI in the text and in lecture.

In the 1980's, many Polish workers found temporary work in Western Europe. For instance, much of the menial labor in Vienna, Austria, was performed by Poles. This Polish migration in search of work would most likely tend to __________ GDP in Poland and ___________ GDP in Austria. A. not change; decrease B. decrease; increase C. decrease; not change D. increase; decrease

B Polish GDP will decrease as its domestic market will have fewer workers working and producing output and earning income. Polish migrants will in turn increase domestic output in Austria, thus increasing Austria's GDP.

When output is at its potential: A. unemployment and capacity utilization rates are likely below the target levels. B. unemployment and capacity utilization rates are likely equal to the target levels. C. unemployment and capacity utilization rates are likely above the target rates. D. the unemployment rate is equal to its target rate, but the capacity utilization rate is above its target rate.

B Potential output is the output that would materialize at the target rate of unemployment as well as capacity utilization.

Given nominal GDP of $4.2 trillion and a GDP deflator which is 20% greater than the base year, we can conclude that real GDP is equal to: A. $3.0 Trillion B. $3.5 Trillion C. $4.2 Trillion D. $5.88 Trillion

B Real GDP is the ratio of nominal GDP to the price index multiplied by 100. In this case, $4.2 trillion/120 x 100 = $3.5 trillion

The Rule of 72 implies that a country with a growth rate of 3 percent: A. will never double its income. B. will double its income in 24 years. C. will double its income in 33 years. D. will double its income in 72 years.

B The Rule of 72 says that a country's income will double in the number of years equal to 72 divided by the country's growth rate, or 24 in this case.

The sum of the values added throughout the economy in one year is equal to: A. the market value of intermediate goods and services plus the market value of final goods and services. B. the market value of final goods and services. C. nominal GDP minus real GDP. D. the dollar value of intermediate goods and services.

B Value added is the increase in value that a firm contributes to a product or service. Summing value added is one way to calculate GDP, and it is the market value of final output of goods and services produced in a one year period.

Which of the following statements is false? A. Cost-push inflation is a rise in the general price level due to higher input prices. B. Cost-push inflation is a rise in the general price level due to the economy operating past or above potential output/income. C. Demand-pull and cost-push inflationary pressures can initiate inflation in an economy. D. Demand-pull and cost-push inflationary pressures can cause continued inflation in an economy as long as they continue unabated.

B We are looking for what is false. In this case, cost-push inflation can exist in an economy that is below potential output/income. Demand-pull inflation, on the other hand, is usually associated with levels of output close to, at, or typically above potential output in an economy.

All of the following problems are the central concern of macroeconomics except: A. inflation. B. income distribution. C. business cycles. D. unemployment.

B The four central macroeconomic problems are growth, business cycles, unemployment, and inflation.

The Rule of 72 implies that a country will double its income in 12 years if its growth rate is: A. 4 percent. B. 6 percent. Incorrect C. 8 percent. D. 10 percent.

B. 6 percent.

Suppose Susan quits her job because she is moving. If she immediately starts looking for work in her new location, but cannot get a job, what type of unemployment best describes her situation? A. Structural unemployment. Correct B. Frictional unemployment. C. Cyclical unemployment. D. Functional disemployment.

B. Frictional unemployment.

If the CPI in year 2 equals 105 and the CPI in year 3 equals 110.25, it can be concluded that consumer prices: A. rose from year 2 to year 3 by 5.25. Correct B. rose from year 2 to year 3 by 5%. C. rose from year 2 to year 3 by 10.25%. D. are the same in year 2 as in the base year.

B. rose from year 2 to year 3 by 5%.

When an economy is experiencing a recession, it is most likely operating: A. at potential output. B. above its secular growth trend line. C. below its secular growth trend line. D. completely impossible to tell since we don't have a graph.

C A recession is growth in output typically below the secular growth trend line, often referred to as potential output. By the way, we don't need a graph to answer this question.

All of the following are incompatible with full employment except: A. cyclical unemployment. B. structural unemployment. C. frictional unemployment. D. any unemployment at all.

C Full employment is an economic climate in which just about everyone who wants a job could have one. Frictional unemployment is viewed as a necessity in a dynamic economy and consistent with full employment. By definition, cyclical and structural unemployment will cause the economy to essentially be below full employment. Therefore, the only form of unemployment compatible with full employment is frictional unemployment. The "any unemployment at all" statement is false due to the information I have presented above.

________________________ is not included in GDP for the United States but is included in GNP for the United States. A. A foreign company's production in the United States B. Income of a citizen of Germany working in the United States C. Economic activity of U.S. citizens working in Japan D. Sales of goods by one U.S. firm to another U.S. firm here in the United States

C GDP measures final output produced within a country's borders. GNP includes production by U.S. citizens living abroad and earning income in that country, as well as U.S. companies producing in other countries in that foreign country, and excludes production by foreign companies and income earned by foreign citizens that occur within another country's borders. This would be added to the host country's GDP, not GNP, which is not what the question is asking for. Also, neither includes sales by one firm to another firm (intermediate goods).

Which of the following economic activities would be included in GDP calculations? A. illegal drug sales. B. installing your own hot water heater. C. services provided by the FBI. D. volunteer work (without pay) at the local homeless shelter.

C GDP measures market activity and excludes nonmarket activity. Police services is a service provided for by the government and is counted as part of government expenditures, and is thus included in GDP calculations. The rest would be excluded from GDP. Please see the text and lectures for further details.

Which of the following types of unemployment is traditional macroeconomic policy specifically designed to combat? A. Frictional unemployment. B. White House unemployment. C. Cyclical unemployment. D. Structural unemployment.

C Government believes they can offset cyclical unemployment and achieve full employment by seeing to it that there is sufficient aggregate demand.

Suppose that nominal GDP increased while prices for all goods and services remained the same (i.e. no inflation). We can conclude that: A. real GDP was higher than nominal GDP. B. real GDP remained the same. C. real GDP increased. D. real GDP decreased.

C If nominal GDP (GDP measured at current prices/not adjusted for inflation) has increased, but the price level (inflation) has stayed the same, we can conclude that real GDP must have also increased, more than likely by about the same amount as the nominal increase.

An increase in nominal GDP accompanied by a decrease in real GDP: A. is impossible. B. implies that the price level in the economy fell. C. implies that the price level in the economy rose. D. implies that the price level in the economy remained the same.

C If nominal GDP increased but real GDP decreased, that means prices for goods and services (price level) must have risen or increased (inflation). Since real GDP is the measure of final output of goods and services produced in the economy in a given year measured at market prices, adjusted for inflation, the price level must be increasing at a faster rate than the increase in nominal GDP in order for real GDP to be decreasing.

Why does inflation discourage people from saving? A. Because inflation makes the future value of money worth more, thus increasing the value of savings. B. Because inflation helps make prices for goods and services lower. C. Because inflation makes the future value of money worth less, thus decreasing the value of savings. D. Because inflation makes us all so happy and cheerful, we can't help but save more.

C Inflation discourages people from saving because they know their money will be worth less tomorrow, and thus buy fewer and fewer goods and services. Because of the value of their savings decreasing, people will save as little as possible, and spend as much of their money/savings today. And no, inflation doesn't make you happy and cheerful. Quite the opposite effect will occur regarding your disposition.

Inflation: A. makes a country poorer. B. redistributes income from those who can raise their prices or wages to those who can't raise their prices or wages. C. distorts the information value of prices. D. makes everyone worse off.

C Inflation does not make a country poorer, or make everyone worse off. It redistributes income from those who cannot raise their prices to those who can. It does distort the information value of prices so that a money price change might not be a relative price change. One has to keep track of more and more prices, which makes life much more complex and less efficient.

Keynesians would likely agree that: A. all unemployment is frictional unemployment. B. if a person isn't working, that's his or her own choice. C. structural and cyclical unemployment are more common than frictional unemployment. D. unemployment is impossible.

C Keynesians see a much more active role for government in reducing unemployment. Therefore, they see structural and cyclical unemployment far more common than frictional, which is what the Classical's view as true.

National Income Accounting: A. is not a set of rules for measuring economic activity in the aggregate economy. B. does not include both real and nominal concepts. C. does not measure sales by all firms within a country. D. does not equate production/output with income.

C National Income Accounting does not measure sales by all firms, only final sales to consumers or final demand. Including sales to other firms (intermediate goods) would be to double count the value of production.

_____________________ is the largest component of total U.S. aggregate expenditures. A. Foreign spending B. Business investment C. Personal consumption D. Government spending

C Personal consumption is the largest of the expenditure categories, accounting for roughly 2/3rds of all expenditures made in the economy on an annual basis here in the U.S.

If nominal GDP is $6,039 billion and the price index for the CPI is 110.1, given this information what would be real GDP? A. $6,648 billion. B. $6,039 billion. C. $5,485 billion. D. $4,200 billion.

C Real GDP is the ratio of the nominal GDP to the price index times 100. In this case, (6,039 / 110.1) x 100 = 5,485 or $5,485 billion.

Proponents of the Classical growth model would be most likely to argue that: A. policies that slow population growth will accelerate economic growth. B. policies that stimulate technological development will reduce economic growth. C. policies that increase consumption at the expense of savings and investment will reduce economic growth. D. budget deficits will help stimulate economic growth.

C Since capital accumulation and formation is the key to economic growth in the Classical growth model, policies that encourage the savings and thus the formation of new capital are most likely going to stimulate economic growth. Conversely, policies that promote consumption and not savings and investment will likely reduce economic growth according to the Classical growth model.

Some factories choose to relocate from the U.S. to Mexico as a result of NAFTA. Some U.S. workers lost their jobs as a result. What type of unemployment best describes the workers' situation? A. Cyclical unemployment. B. Full employment. C. Structural unemployment. D. Frictional unemployment.

C Structural unemployment is unemployment caused by economic restructuring such as new trade agreements (i.e., NAFTA).

Suppose a farmer buys $100 worth of seed, $50 worth of fertilizer, and $100 worth of water to produce $800 worth of wheat. The value added (what would go into GDP) at that farm is: A. $450 B. $500 C. $550 D. $1050

C Subtract the cost of production ($250) from final output ($800) to find the contribution to GDP ($550) by the farmer.

Suppose Kenya doubles its income in 6 years while South Africa doubles its income in 12 years. According to the Rule of 72, the growth rate in Kenya is: A. 3 percentage points higher than the growth rate in South Africa. B. 4 percentage points higher than the growth rate in South Africa. C. 6 percentage points higher than the growth rate in South Africa. D. 12 percentage points higher than the growth rate in South Africa.

C The Rule of 72 says that a country's income will double in the number of years equal to 72 divided by the country's growth rate. Dividing 72 by 6 and 12 gives growth rates of 12% and 6% respectively for Kenya and South Africa.

Which of the following is known as the national income accounting identity? A. GNP equals GDP. B. Assets equal liabilities. C. The value of output (production) equals income. D. Supply equals demand.

C The national income accounting identity is the accounting equality of output and income.

Use the following information to answer the question: There are three firms in an economy: X, Y, and Z. Firm X buys $400 worth of goods from Firm Y, and $200 worth of goods from Firm Z to produce 250 units of output at $3 per unit. Firm Y buys $250 worth of goods from Firm X and $250 worth of goods from Firm Z to produce 250 units of output at $4 per unit. Firm Z buys $100 worth of goods from Firm X and $500 worth of goods from Firm Y to produce 500 units at $2 per unit. Given this information, using the Value Added approach to eliminating intermediate goods and services (in order to avoid double-counting), what is the economy's GDP? A. $0 B. $1,425 Correct C. $1,050 D. $7,200

C. $1,050

Which of the following do the GDP statistics measure least well? A. The size of the overall economy in terms of output. B. The rate of change in the overall growth rate of an economy. Correct C. The economic welfare or happiness of an economy. D. The amount of Personal Consumption during a given year.

C. The economic welfare or happiness of an economy.

Say the current year's GDP is equal to $10.6 trillion. If personal consumption is $6.2 trillion, business investment is $1.8 trillion, and government purchases are $2.9 trillion, then: A. exports are exactly equal to imports. B. exports exceed imports by $.3 trillion. Correct C. imports exceed exports by $.3 trillion. D. exports exceed personal consumption by $.3 trillion.

C. imports exceed exports by $.3 trillion.

The primary purpose of national income accounting is to: A. determine whether macroeconomic policies improve social welfare. B. help macroeconomists develop better models. Correct C. measure aggregate economic activity. D. help keep the accounting profession alive and well.

C. measure aggregate economic activity.

If per capita real output is decreasing, then it is most likely that: A. real GDP is increasing. B. real GDP is growing faster than the population. Correct C. real GDP is growing slower than the population. D. the population is decreasing.

C. real GDP is growing slower than the population.

If the price of housing (which accounts for roughly 40% of total expenditures in the CPI basket) rises by 15% in one year while the prices of all other goods rises by 25%, by how much will the CPI rise by given this information? A. 10% B. 12% C. 15% D. 21%

D Add the sum of the product of the shares by the rise in the share itself, or CPI Inflation Rate = (.4 x .15 + .6 x .25) = .21 or 21%

Use the following information to answer the question. There are three firms in an economy: X, Y and Z. Firm X buys $200 worth of goods from Firm Y and $300 worth of goods from Firm Z, and produces 250 units of output at $5 per unit. Firm Y buys $150 worth of goods from Firm X, and $250 worth of goods from Firm Z, and produces 300 units of output at $8 per unit. Firm Z buys $75 worth of goods from Firm X, and $50 worth of goods from Firm Y, and produces 100 units at $5 per unit. Assuming all other products are sold to final consumers, what is GDP for our three firm economy? A. $1025. B. $1325. C. $2780. D. $3125.

D GDP is the sum of the value added by the three firms, which is = $750 + $2000 + $375 = $3125.

Say GDP is equal to $7 trillion. If personal consumption "C" is $4.2 trillion, business investment "I" is $1.4 trillion, and government purchases "G" are $1.8 trillion, then: A. exports are equal to imports. B. exports exceed imports by $0.4 trillion. C. exports are equal to $0.4 trillion. D. imports exceed exports by $0.4 trillion.

D GDP=Consumption+Investment+Government expenditures+(Exports-Imports). Rewritten, Net exports = GDP - Consumption - Investment - Government expenditures = 7-4.2-1.4-1.8 = -0.4

If U.S. exports of goods and services exceed imports: A. GDP in the U.S. will be less than the sum of consumption, investment, and government. B. GDP in the U.S. will equal the sum of consumption, investment and government purchases. C. net exports for the U.S. will be negative. D. GDP in the U.S. will exceed the sum of consumption, investment, and government purchases.

D Imports are subtracted and exports are added to the GDP figure. Thus, if exports exceed imports, net exports are positive, and therefore the GDP figure will be exceed the sum of consumption, investment, and government purchases.

Which of the following is not part of national income? A. Employee compensation. B. Interest payments. C. Rent. D. Social Security Payments.

D National income is the sum of employee compensation, interest, rent, and profits. Social security payments are considered transfer payments, and do not appear in national income, since it is a transfer from taxpayers to recipients, and plus no labor has been performed for the payment per se.

If a firm sold $700 worth of goods which cost $1,000 to produce: A. national income would no longer equal GDP. B. the firm's loss needs to be subtracted from final sales so that income and output are still equal. C. the firm's loss would not be added to national income. D. national income would still equal GDP.

D Profit (or loss) is what remains after all other income is paid out. It is what equates income and output. A loss will offset payments to other factors so that ultimately income still equals output.

If nominal output is $4.4 trillion and the GDP Deflator is 15 percent higher than its base year, then real output is: A. $4.84 trillion. B. $4.4 trillion. C. $4.0 trillion. D. $3.83 trillion.

D Real output is calculated as the ratio of nominal output to the price index times 100; (4.4/115) x 100 = 3.83 or $3.83 trillion.

If your nominal wage is increasing faster than the price level: A. your nominal wage is declining. B. your purchasing power is declining. C. your real wage is declining. D. your real wage is increasing.

D To find the change in a "real" figure, subtract the percent change in the price level from the percent change in the nominal figure. Since the nominal wage has risen by more than the rise in the price level, real wage is therefore increasing.

If a dealer of rare artifacts purchases a 2nd Century Roman Vase for $250,000 and sells it to a wealthy collector for $320,000 during a given year, how much has been added to GDP for that year? A. Nothing, because the vase was produced centuries ago. B. $20,000 C. $320,000 Correct D. $70,000

D. $70,000

If nominal output is $10.8 trillion and the GDP Deflator is 15% higher than in the base year, then real output is: A. $6.26 Trillion. B. $7.89 Trillion. C. $8.15 Trillion. Correct D. $9.39 Trillion.

D. $9.39 Trillion

If the price of clothing (which accounts for roughly 5% of the total expenditures in the CPI basket) rises by 30% in one year while the prices of all the other goods in the CPI basket increase by 10%, by how much will the CPI rise? A. 4.5 percent. B. 6 percent. C. 7.5 percent Correct D. 11 percent.

D. 11 percent.

The percentage change in the _______________ provides an early indication of the future change in prices of consumer goods in the economy. A. GDP Indicator B. CPI C. GDP Deflator Correct D. PPI

D. PPI

If Switzerland has invested substantially more money in foreign countries than foreigners have invested in Switzerland, then we might expect: A. Swiss net foreign factor income to be negative. B. Swiss net foreign factor income to be zero. C. Swiss GDP to exceed Swiss GNP. Correct D. Swiss GNP to exceed Swiss GDP.

D. Swiss GNP to exceed Swiss GDP

The business cycle here in the United States: A. became more severe after 1980. B. became more severe after World War I. C. ceased to occur after 1999. Correct D. became less severe after World War II.

D. became less severe after World War II.

Without markets: A. a nation could better harness its comparative advantage. B. people would be less self-sufficient. C. specialization and the division of labor would increase. Correct D. specialization and the division of labor would decrease.

D. specialization and the division of labor would decrease.

Economic growth does not depend on how much people save or businesses invest, only on how much they consume. True False

False. According to the text, investing now does help create the machines and knowledge that in the future can be used to produce even more output, which is essentially what the Classical Growth Model focuses on.

Classical growth theory argued that economic growth was limited because of increasing returns to scale. True False

False. Classical growth theory argued that growth was limited because the accumulation of either labor or capital would eventually produce smaller increments in output as diminishing marginal productivity set in.

GDP = C + I + G + M True False

False. GDP = C + I + G + (X-M)

Your visit to the dentist earlier this month to have your teeth cleaned, as a service, is not part of GDP. True False

False. GDP includes expenditures on services, such as dental services.

Gross domestic product (GDP) is the total market value of all intermediate goods and services produced in the economy in a one-year period, measured at market prices. True False

False. Gross domestic product (GDP) is the total market value of all final (not intermediate) goods and services produced in the economy in a one-year period, measured at market prices.

If nominal GDP from 1996 to 1997 rose by 9%, and the general price level in the economy rose by 3% from 1996 to 1997, real GDP therefore rose 12% from 1996 to 1997. True False

False. Subtract the percentage change in prices from the percentage change in nominal output to determine the change in real GDP; 9% - 3% = 6%. Please see text and lecture for more details regarding this calculation.

The Industrial Revolution ended unemployment as a problem for society due to the shift to wage labor and division of responsibilities which occurred at that time. True False

False. The Industrial Revolution led to unemployment as a problem due to the division of labor, not ended it.

The target rate of unemployment is defined as the absolute lowest rate of unemployment that can possibly be achieved, usually around 0%. True False

False. The target rate of unemployment is defined as the lowest rate of unemployment that can be achieved without creating accelerating inflation.

Assuming that the physical output (i.e., the actual quantity of all final goods and services) of all final goods and services remains constant, if the general price level in the economy triples, so does nominal output. Correct True False

True

Comparisons of per capita GDP figures across countries provide a rather crude (but helpful) estimate of how similar or different living standards are for people living in different countries. Correct True False

True

Growth Policies that only encourage the accumulation of physical and human capital are not necessarily the most effective means of increasing economic growth in an economy. Correct True False

True

The unemployment rate is calculated by dividing the number of unemployed people by the potential labor force, and then times 100 to get the percentage of people unemployed. Correct True False

True

Unlike the Classical Growth Theory, the New Growth Theory does not argue that growth is limited by diminishing marginal productivity. Correct True False

True

Long-term growth in an economy can typically be attributed to population growth and productivity growth. True False

True. Long-term growth depends upon the inputs to production. The two major determinants are labor (population) and how much labor can produce in an hour (productivity).

Add up the value of the goods and services produced in the economy (excluding those intermediate goods and services produced) in a one year period measured at market prices to arrive at GDP. True False

True. Adding up the market value of all goods and services, including intermediate goods and services, would lead to double counting and overstating GDP. As such, to eliminate double counting, we subtract out intermediate goods and services to arrive at GDP.

Because official price indexes do not account for some improvements in product quality, official estimates of real GDP underestimate the true increase in real output. True False

True. Because official price indexes do not account for some improvements in product quality, the price indexes typically overestimate inflation and thus underestimate the true increase in real output.

Demand pull inflation is generally characterized by shortages of goods and workers. True False

True. Demand pull inflation is typified by shortages of goods and shortages of workers in the economy as a whole. Please see the text and lecture for further details regarding demand pull inflation.

GDP measures the economic activity that occurs within a country regardless of who owns the resources, GNP measures the economic activity of the citizens and businesses of a country. True False

True. GNP measures the economic activity of the citizens and businesses of a country, GDP measures the economic activity that occurs within a country.

Expenditures on capital and equipment are counted as part of GDP. True False

True. Investment expenditures are part of GDP.

National income accounting is a set of rules and definitions to use in measuring total economic activity in the aggregate economy. True False

True. National income accounting records total production using a set of rules and definitions.

Frictional unemployment is typically caused by people quitting a job just long enough to look for and find another one, along with people entering the job market. True False

True. Please see the definition and discussion regarding frictional unemployment is both the text and in lecture.

If the economy were producing at its potential output, then the unemployment rate would most likely be equal to the target rate of unemployment True False

True. See definition of potential output in the text and in lecture. If the economy is producing at its potential, it is very likely that the economy would be at its target rate of unemployment (as well as its target rate of capacity utilization as well).

An increase in real GDP over time means that there has been a real increase in production and income. True False

True. Since real GDP measures market transactions by keeping prices constant through adjusting for inflation, a rise in real GDP will mean that production and income have increased.

Incentives for growth are generally greater when resources are privately owned. True False

True. When individuals get to keep much of the gains of growth for themselves (ie. own the productive resources), they have the incentives to work harder which leads to growth.