Econ 202 Exam 2

For any given year, the CPI is the price of the basket of goods and services in the

given year divided by the price of the basket in the base year, then multiplied by 100. b.

In the actual economy, goods and services are purchased by

households, firms, and the government.

To which of the problems in the construction of the CPI is the creation of the mobile phone most relevant?

introduction of new goods

Consumer surplus

is measured using the demand curve for a product.

International data on GDP and socioeconomic variables

leave no doubt that a nation's GDP is closely associated with its citizens' standard of living.

Minimum-wage laws dictate the

lowest price employers may pay for labor.

When new goods are introduced, consumers have more variety from which to choose. As a result, each dollar is worth

more, and the cost of living decreases.

National income differs from net national product because

of a statistical discrepancy.

With respect to the consumer price index, the substitution bias arises because

prices of goods and services do not change in the same proportion from year to year.

A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. Most of his income was, and continues to be, from gambling. His move

raises GDP.

A supply curve can be used to measure producer surplus because it reflects

sellers' costs.

You know that a candy bar costs sixty cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices?

sixty cents x (1962 CPI / today's CPI)

A Korean steel company produces steel in the United States, with some of its steel being exported to other nations and some of it being sold within the United States. If the prices of this steel increase, then

the GDP deflator and the CPI will both increase.

The consumer price index is subject to substitution bias because

the law of demand applies to most, if not all, goods.

Suppose the market demand curve for a good passes through the point (quantity demanded = 100, price = $25). If there are five buyers in the market, then

the marginal buyer's willingness to pay for the 100th unit of the good is $25.

A stove is produced by a firm in 2014, added to the firm's inventory in 2014, and sold to a household in 2015. It follows that

the value of the good is added to the investment category of 2014 GDP, added to the consumption category of 2015 GDP, and subtracted from the investment category of 2015 GDP.

The price tag on a golf ball in 1975 read $0.20, and the price tag on a golf ball in 2005 read $2.00. The CPI in 1975 was 52.3, and the CPI in 2005 was 191.3. Refer to Scenario 24-2. The price of a 1975 golf ball in 2005 dollars is

$0.73

You are offered a free ticket to see the Chicago Cubs play the Chicago White Sox at Wrigley Field. Assume the ticket has no resale value. Willie Nelson is performing on the same night, and his concert is your next-best alternative activity. Tickets to see Willie Nelson cost $40. On any given day, you would be willing to pay up to $50 to see and hear Willie Nelson perform. Assume there are no other costs of seeing either event. Based on this information, at a minimum, how much would you have to value seeing the Cubs play the White Sox to accept the ticket and go to the game?

$10

Harry spent $39,000 in 2009 and $42,000 in 2014 on goods and services. The consumer price index was 220 for 2009 and 231 for 2014. Harry's 2009 spending in 2014 dollars is about

$40,950.

The only four producers in a market have the following costs: Seller Cost Evan $50 Selena $100 Angie $150 Kris $200 If the sellers bid against each other for the right to sell the good to a consumer, then the producer surplus will be

$50 or slightly less.

In 2014, a farmer grows and sells $3 million worth of corn to Big Flakes Cereal Company. Big Flakes Cereal Company produces $8 million worth of cereal in 2014, with sales to households during the year of $7 million. The unsold $1 million worth of cereal remains in Big Flake Cereal Company's inventory at the end of 2014. The transactions just described contribute how much to GDP for 2014?

$8 million

Suppose in the year 2000 Ken earned $60,000 per year. If the CPI in the year 2000 was 172.2 and in 2015 was 236.7, what is the minimum level of income Ken would have needed to earn in 2015 to have maintained the same standard of living he had in 2000?

$82,474

Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 2012, the basket's cost was $50; in 2014, the basket's cost was $52; and in 2016, the basket's cost was $58. The value of the CPI in 2016 was

111.5

Jake loaned Elwood $5,000 for one year at a nominal interest rate of 10 percent. After Elwood repaid the loan in full, Jake complained that he could buy 4 percent fewer goods with the money Elwood gave him than he could before he loaned Elwood the $5,000. From this, we can conclude that the rate of inflation during the year was

14%

Between October 2014 and October 2015, the CPI in Canada rose from 120 to 124 and the CPI in Mexico rose from 210 to 229.1. What were the inflation rates for Canada and Mexico over this one-year period?

3.3 percent for Canada and 9.1 percent for Mexico

If nominal GDP is $10 trillion and real GDP is $12 trillion, then the GDP deflator is

83.33, and this indicates that the price level has decreased by 16.67 percent since the base year.

Which of the following changes in the price index produces the greatest rate of inflation: 100 to 110, 150 to 165, or 180 to 198?

All of these changes produce the same inflation rate

Underground economic activity as a percentage of GDP was highest in

Bolivia

When policymakers are considering a particular action, they can use consumer surplus as a(n)

Both b) and c) are correct. b. objective measure of the benefits to buyers as determined by policymakers. c. measure of the benefits to buyers as the buyers perceive them.

All else equal, what happens to consumer surplus if the price of a good decreases?

Consumer surplus increases

How is net national product (NNP) calculated?

Depreciation losses are subtracted from the total income of a nation's citizens.

The following table represents the costs of five possible sellers. Seller Cost Abby $1,600 Bobby $1,300 Dianne $1,100 Evaline $900 Carlos $800 Who is a marginal seller when the price is $1,100?

Dianne

Wholesome Wheat Bakery buys $10.00 worth of flour from Mikes' Mill and uses the flour to make bread. Wholesome Wheat sells the bread to the public for $22.00. Taking these two transactions into account, what is the effect on GDP?

GDP increases by $22.00

Suppose an apartment complex converts to a condominium, so that the former renters are now owners of their housing units. Suppose further that a current estimate of the value of the condominium owners' housing services is the same as the rent they previously paid. What happens to GDP as a result of this conversion?

GDP is unaffected because previously the rent payments were included in GDP and now the rent payments are replaced in GDP by the estimate of the value of owner occupied housing services.

You have responsibility for economic policy in the country of Freedonia. Recently, the neighboring country of Sylvania has cut off all exports of oranges to Freedonia. George, who is one of your advisors, says that the best way to avoid a shortage of oranges is to take no action at all. Charles, another one of your advisors, argues that without a binding price floor, a shortage will certainly develop. Otto, a third advisor, suggests that you should impose a binding price ceiling in order to avoid a shortage of oranges. Which of your three advisors is most likely to have studied economics?

George

Suppose a basket of goods and services has been selected to calculate the consumer price index. In 2005, the basket of goods cost $108.00; in 2006, it cost $135.00; and in 2007, it cost $168.75. Which of the following statements is correct?

If the CPI is 156.25 in 2007, then 2005 is the base year.

Which of the following is the most accurate statement?

In the 1970s, both the GDP deflator and the consumer price index showed high rates of inflation, and in the late 1980s, 1990s, and 2000s, both measures showed low rates of inflation.

Janet bought flour and used it to bake bread she ate. ABC Bakery bought flour which it used to bake bread that customers purchased. In which case will the flour be counted as a final good?

Janet's purchase but not ABC Bakery's purchase

The welfare of sellers is measured by

Producer surplus

Sophia puts money in the bank and earns a 5 percent nominal interest rate. If the inflation rate is 2 percent, then after one year,

Sophia will have 5 percent more money, which will purchase 3 percent more goods.

In calculating the CPI, a fixed basket of goods and services is used. The quantities of the goods and services in the fixed basket are determined by

Surveying consumers

The U.S. government pays an economist at the U.S. Department of Commerce $100,000 in salary in 2013. The economist then retires. In 2014, the government pays him $60,000 in Social Security benefits. Which of the following is correct?

The 2013 payment is included in 2013 GDP as government purchases, but the 2014 payment is not included in 2014 GDP.

A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result,

U.S. investment and GDP increase, but German GDP is unaffected.

You receive a paycheck from your employer, and your pay stub indicates that $400 was deducted to pay the FICA (Social Security/Medicare) tax. Which of the following statements is correct?

Your employer is required by law to pay $400 to match the $400 deducted from your check.

Which of the following will cause an increase in consumer surplus?

a technological improvement in the production of the good

Which of the following values would be included in U.S. GDP for 2015?

a. he rent that Jim, an American citizen, paid on his apartment in San Francisco in 2015. b. the value of the legal services provided by Juan, an attorney and a Mexican citizen, who lived in San Antonio and practiced law there in 2015 c. the rent that Sam, an American citizen, would have paid on his home in Houston in 2015 had he not owned that home. d.******* All of the above would be included in U.S. GDP for 2015.

A 2009 Chevrolet model has more horsepower than the 2008 version and is included in the BLS basket of goods. BLS attempts to account for this change in the market basket by

adjusting the price of the good to account for the quality change.

Rent controls can cause

all of these are possible results of rent controls. a decline in the quality of housing available for rent. the development of a black market to allocate apartments to renters. longer search times for renters attempting to locate an apartment.

Most goods and services produced at home

and most goods and services produced illegally are excluded from GDP.

A price ceiling is binding when it is set

below the equilibrium price, causing a shortage.

Price ceilings and price floors that are binding

cause surpluses and shortages to persist because price cannot adjust to the market equilibrium price.

A tax on the sellers of coffee will increase the price of coffee paid by buyers,

decrease the effective price of coffee received by sellers, and decrease the equilibrium quantity of coffee.

Oil is used to produce gasoline. If the price of oil increases, consumer surplus in the gasoline market

decreases

The price received by sellers in a market will decrease if the government

decreases a binding price ceiling in that market.

A tax imposed on the sellers of a good will lower the

effective price received by sellers and lower the equilibrium quantity.