Econ 202 Midterm 1

Which of the following sales would NOT involve a U.S. FINAL good, but would be counted indirectly to increase U.S. GDP?

Wine produced in the United States sold to, and used by, a U.S. restaurant in recipes to produce food.

Which of the following expenditures would increase the consumption component of U.S. GDP?

You buy a new book about the financial markets

Which of the following would increase the consumption component of current U.S. GDP?

You purchase a bottle of wine in Lansing that was produced last year in France.

Which of the following is relatively more micro than macro oriented?

The survival of General Motors

Which of the following items would affect the measured value of U.S. GDP?

The value of steel produced in Florida by Gibraltar, a German steel company, which is added to its inventory of steel.

Which of the following is NOT included in this year's investment expenditures?

Tires produced last year and purchased by a car manufacturer this year

"Indexing" social security is the practice of increasing nominal payments according to the percentage increase in a price index so the real value of the payments remains constant.

True

"Investment" is a flow variable.

True

"Shoe-leather" costs refer to the costs of economizing on cash, including more frequent trips to the bank, new cash management systems and increased employment bank costs, when the inflation rate increases.

True

A contraction or recession begins at a business cycle peak.

True

An open-market purchase of government securities by the Federal Reserve results in an increase in bank reserves.

True

By definition, a government budget deficit occurs when government spending is greater than tax collections.

True

Financial intermediaries are institutions that facilitate the channeling of funds between lenders and borrowers indirectly. That is, savers (lenders) give funds to an intermediary institution (such as banks), and then that institution, in turn, lends those funds to spenders (borrowers).

True

For "deficit" to have a meaningful value, the phrase, per (specific) time period is needed with the amount; e.g., $1000 per month. As a consequence, "deficit" is a flow variable.

True

If a factory worker's real wage increases by 20% from the beginning of one year to the beginning of the next while during the same time frame the price level is 25% higher, then the factory worker's nominal wage is 50% higher at the beginning of that next year from what it was at the beginning of the preceding year. (Hint: One approach is to use a specific example with numbers to determine whether the statement is accurate.)

True

If a nation's growth rate of output as measured by real GDP is positive while the population remains constant, then the standard of living in that nation is increasing.

True

If lenders expect the inflation rate to increase in the future over the life of a loan, they will require higher nominal interest rates than otherwise on such new loans.

True

If there is an inflation rate increase during the term of a fixed nominal interest rate loan that was NOT fully anticipated when the loan was negotiated, then, for that reason, lenders will regret having made the loan.

True

Output per person must be higher in an economy with a higher level of average labor productivity and the same fraction of the population employed.

True

The "core" inflation rate is calculated by excluding the prices of food and energy.

True

The CPI compares the current cost of purchasing the base-year basket of goods with what the base-year cost was to purchase the base-year basket of goods.

True

The nation's inflation rate is a macroeconomic issue.

True

The nominal interest rate measures a percentage increase in dollar value while the real interest rate measures a percentage increase in purchasing power.

True

The official unemployment rate increases if some workers decide to quit their full-time jobs and to search for higher paying jobs.

True

The rate at which prices in general are increasing over time is called a nation's rate of inflation.

True

The use of money as a medium of exchange permits specialization in production dramatically increasing efficiency and living standards.

True

The value of your purchase of 100 shares of General Electric stock is NOT included in investment spending when measuring GDP by the expenditure approach.

True

With deposit insurance, banks are more likely to make bad loans. Without deposit insurance, bank runs and systemic collapse are more likely.

True

Which of the following items would NOT be included in the income approach to measuring GDP?

Unemployment compensation paid to a no longer employed teacher living in Michigan

During "disinflation" the inflation rate is rising.

False

Bob's Barber Shop cut 10,000 heads of hair in the year 2004 and 12,000 in the year 2005. The price of a hair cut was $12 in 2004 and $16 in 2005. If the year 2004 is the base year, what was nominal GDP in the year 2004 assuming no other output in the economy?

$120,000; 2004: Q: 10,000 P: $12 2005: Q: 12,000 P: $16 Nominal GDP 2004= (10,000 * 12) = $120,000

Bob's Barber Shop cut 10,000 heads of hair in the year 2004 and 12,000 in the year 2005. The price of a hair cut was $12 in 2004 and $16 in 2005. If the year 2004 is the base year, what was real GDP in the year 2005 assuming no other output in the economy?

$144,000; 2004: Q: 10,000 P: $12 (Base year) 2005: Q: 12,000 P: $16 Real GDP 2005= (12,000 x 12) = 144,000

On January 1, 2000 Tanya purchases three (3) newly issued two-year government notes with each having a principal amount of $1,000 and each with a coupon rate of 5% paid annually. If Tanya decides to sell her notes on January 1, 2001 (after receipt of the first interest payments from the three notes) and if new one-year government debt at that time pays at a simple annual interest rate of 12.5% (12.5% coupon rate on newly issued one-year debt), people would be willing to pay and Tanya would be willing to accept _____ for Tanya's old notes (rounded to the nearest dollar).

$2,800; $2,800 Payment made to Tanya at the end of year January 1, 2001 on one note = 1,000 + 5% of 1,000 = $ 1,050 Payment

Suppose a jar of DeLux popcorn that is ultimately sold to a customer at Friendly Groceries is produced by the following production process: Name of Company; Revenues; Cost of Purchased Inputs --- respectively: Fulton Family Farm; $2.00; $0 DeLux Popcorn Co.; $5.00; $2.00 Friendly Groceries; $6.50; $5.00 Suppose the corn was grown on the farm and sold in 2000 while the jar of popcorn was produced by the DeLux Popcorn Co. in the year 2001. The jar of popcorn was sold to Friendly Groceries, which puts the jar on its shelves for purchase at $6.50 all in 2002, but the jar is not sold to a customer until the year 2003. What is the contribution of these transactions to GDP in the years 2000 and 2001 respectively?

$2.00, $3.00 2000 Contribution: $2.00 grown & sold on farm 2001 Contribution: $5.00 - $2.00 = $3.00

Use the information below to calculate the value added by the firm. Rent paid for office space: $25,000 Wages paid to workers: $75,000 Value of produced inputs used up to produce the firm's output that were purchased from other firms: $250,000 Value of firm's output: $550,000

$300,000; = (550,000 firm's output - 250,000 purchased inputs) = $300,000

On January 1, 2000, Tanya purchases three (3) newly issued two-year government notes with each having a principal amount of $1,000 and each with a coupon rate of 10% paid annually. She will receive a total of exactly _____ in interest payments each year as a result of the purchase.

$300;

Suppose there is $400 million of cash in the economy with 1/4 of it held in bank vaults as reserves. If the required reserve to checking deposit ratio is 20%, the money supply will be _____ if banks hold no excess reserves.

$800 million; -$400 million of cash in existence -$100 million of it held in bank vaults as reserves (400m - 100 m) = 300m in hands of public = (Reserves/Deposits) = .20 =($100 million/Deposits) = (1/5) Deposits = $500 million (by cross multiplying). -Thus, the money supply = $500 million in checking account deposits and = $300 million of cash in the hands of the public = (500M + 300M) = $84 million.

According to the article, Slowing growth in China has rippled across the world, hitting commodity-producing countries hard. Domestically, Fed officials are also grappling with an inflation rate that remains too low, rising just _____ percent for the 12 months ended July, according to the Fed's preferred measure of price pressures.

0.3

The government budget surplus equals ______.

= (taxes - government expenditures)

An accurate expression of NATIONAL saving is ____.

=(Y - C - G)

Econland produces only two goods, baseballs and basketballs. The quantity and price for each of the two goods for the years 2001 and 2002 were as follows. 2001: 200 baseballs at $10 per ball and 100 basketballs at $20.00 per ball.2002: 500 baseballs at $8 per ball and 100 basketballs at $44 per ball.If the base year is 2001, the GDP deflator for 2002 (rounded to the nearest whole number) equaled ____.

120

Calculate GDP for the imaginary economy below. All figures are in billions of dollars. Consumption: 9,000 Investment: 2,000 Government purchases: 4,000 Net Exports: 1,000 Taxes: 3,000

16,000;

The consumer price index bundle for Planet Econ consists of only two items: books and hamburgers. In 2001, the base year, the typical consumer purchased 20 books for $25 each and 300 hamburgers for $5 each. In 2005, the typical consumer purchased 25 books for $100 each and 250 hamburgers for $4 each. The consumer price index for 2005 on Planet Econ equals ____.

160; The CPI uses the base-year basket of goods; -20 books and 300 hamburgers. -At $100 per book and $4 per hamburger, expenditure on the base-year basket (20 * 100) + (4 * 300) = $3,200 -At $25 per book and $5 per hamburger, expenditure on the base-year basket (25 * 100) + (5 * 300) = $4,000 CPI = (cost of CPI basket at current prices/cost of CPI basket at base-year prices) x 100. = CPI = ($3200/$4000)*100 =

In Econland, nominal GDP was $280 billion in 1975 and $420 billion in 1987. If prices, as measured by a price index, doubled from 120 in 1975 to 240 in 1987, then Econland real GDP in 1987 was _______ .

175 billion; Real GDP = (Nominal GDP 1987)/(Price 1987/100) =(420)/(240/100) = 420/2.4 = 175 billion

According to the article: "The Committee judged it appropriate to wait for more evidence, including some further improvement in the labor market, to bolster its confidence that inflation will rise to _____ percent in the medium term," she said.

2

Bob's Barber Shop Cut: -10,000 heads of hair in the year 2004 -12,000 in the year 2005 -The price of a hair cut was $12 in 2004 - Price $16 in 2005. If the year 2004 is the base year, what was the percentage rate of change in real GDP between 2004 and 2005 assuming no other output in the economy?

20% ; 2004 RGDP: 10,000 heads * $12= 120,000 2005 RGDP: 12,000 heads * $12= 144,000 (144,000 / 120,000) = 1.2 1.2 - 1 = 20%

The GDP deflator rose from 110 to 132. The inflation rate over the period was ____ percent.

20;

If the CPI in the current year is 150 up from 120 in the previous year, then the simple annual inflation rate for the current year is ______.

25%; Inflation rate= (CPI in current year - CPI in previous year) / (CPI in previous year) = (150 - 120)/ (120) = (30)/(120) = 25%

Econland produces only two goods, baseballs and basketballs. The quantity and price for each of the two goods for the years 2001 and 2002 were as follows. 2001: 200 baseballs at $10 per ball and 100 basketballs at $20.00 per ball. 2002: 500 baseballs at $8 per ball and 100 basketballs at $44 per ball. If the base year is 2001, real GDP for 2001 equaled ____.

4,000;

According to the article, the economy created 2.92 million jobs in the year ended in August, pushing the jobless rate down to _____ percent, around the level that many Fed policy makers consider full employment.

5.1

In a shmoo economy, if your bank account during one year increases from $3000 to $3816 while at the same time the price of the shmoo increases from $10 each to $12 each, then the simple one-year REAL interest return (rate) is ______ . (Note: This problem must be done using the techniques discussed in the PowerPoint notes and not the methods provided in the textbook to obtain the correct answer.)

6.00%; Put $3000 into bank yielding 27.2% per year During same year, price of shmoo increase from 10 to 12 At end of year, bank account will have value of V1= V0 *(1 + i) V0 = initial deposit of 3,000 V1 = 3,000* (1 + .272) = 3816 Purchasing power at beg. was 3000/10 per shmoo = 300 Purchasing power at end is 3816/12 = 318 The real interest rate (r), % change in purchasing power, = (318-300)/300 = 6%

Econland produces only two goods, baseballs and basketballs. The quantity and price for each of the two goods for the years 2001 and 2002 were as follows. 2001: 200 baseballs at $10 per ball and 100 basketballs at $20.00 per ball. 2002: 500 baseballs at $8 per ball and 100 basketballs at $44 per ball. Nominal GDP for 2002 equaled ____.

8,400;

Which of the following is most likely to occur during a U.S. recession?

A decrease in the inflation rate

Which of the following would be counted as investment when U.S. GDP is calculated?

A newly constructed house in Alabama is purchased by a resident of Germany.

Which of the following would increase U.S. gross national product (GNP), but not change U.S. gross domestic product (GDP)?

An increase in Ford's output in Japan, which is exported to be sold in China.

An example of monetary policy is when the Federal Reserve reduces the prime rate to near zero percent.

False

"Deflating" is the process of dividing a real quantity by a price index to express the quantity in terms of purchasing power.

False

If a bank account pays a simple annual nominal interest rate of 9% on deposits and if the simple inflation rate over a year turns out to be 5%, then the bank account dollar value, but not its real value, will be 4% higher at the end of the year.

False

If a person's nominal wage rate rises from $24 per hour to $32 per hour at the same time the CPI increases from 120 to 160, then the person's real wage rate has remained unchanged at $24 per hour.

False

If the price of a fixed coupon rate bond decreases, the yield to maturity earned by a new purchaser of the bond is not affected.

False;

The Board of Governors of the Federal Reserve consists of 12 governors appointed for 14-year terms.

False; 7 governors

Average labor productivity will necessarily increase if more output is produced with more workers.

False; Average labor productivity is (Av. amount of output per employed worker/employed)

Generally, long-term economic growth is enhanced by having a command economy.

False; long-term economic growth is enhanced by: -- High rates of saving and investment -- The use of scarce saving to fund the most productive projects

If the government budget deficit is reduced, the rate of employment growth will increase" is primarily a normative statement.

False; positive statement (what is)

On a day-to-day basis, the supply of money in the U.S. economy is determined by the U.S. Treasury.

False; the Fed

The discount rate is the rate commercial banks charge their best customers for a loan.

False; the rate the Fed charges commercial banks that borrow reserves from it

A trade surplus occurs when a country redeems maturing bonds that it issued in the past without issuing new bonds.

False; trade surplus is when exports> imports

Savings accounts are included in the measure "M1" of the money supply.

False; would be M2

Which of the following expenditures would increase the investment component of U.S. GDP.

IBM buys a new office chair

A leakage, as defined in the PowerPoint notes, out of the income-expenditure circular flow is (are) ______ .

Imports

Which of the statements below is relatively more normative in nature?

It is important to reduce the unemployment rate.

When Toyota produces cars in the U.S. that are then exported to Germany, the value of the output is included in ____.

Japan GNP

Which of the following purchases of newly produced goods would NOT be directly included in the calculation of the four types of spending on final goods and services that are counted in GDP?

Purchase of steel produced in Indiana by Boeing that it uses to produce planes

The value of output was $400 in Northland and $900 in Southland. The population of Northland was 50 and the population of Southland was 125. There were 40 employed workers in Northland and 60 employed workers in Southland. Average labor productivity was higher in _______ and the standard of living was _____ .

Southland; higher in Northland

According to the article, just like today, much of the Fed's initial reservations about acting in 2013 centered on developments in emerging markets, which had been rocked by Bernanke's suggestion a few months earlier that a taper was on its way. Looming in the background then, as it is now, was the threat of _____.

a U.S Government shutdown

Bonds can be characterized most accurately as ____ .

a legal promise to pay back a loan with interest

The substitution bias in the CPI includes the failure of statisticians to ____.

allow for the possibility that consumers switch away from products whose prices are rising

An example of a financial intermediary is ______ .

an insurance company

According to the article, and the turmoil in financial markets didn't deter households in August, with _____ climbing to their highest level since 2005.

auto sales

If business inventories at the beginning of the year equal $40 billion and equal $60 billion at the end of the year, then, as a result, the investment component of GDP will ____.

increase by 20 billion; = (Ending Inventory - Beginning Inventory) GDP Investment Component= 20 billion

According to the article, the labor market isn't the only thing percolating. _____, which Yellen said was the main driver of the economy, climbed 3.2 percent in the 12 months through July, among the best year-over-year readings of the current expansion.

consumer spending

Which component of GDP would increase by the value of the sale, if any, if you were to purchase a newly produced automobile?

consumption

If, for the CURRENT year, the value of REAL GDP is greater than that of NOMINAL GDP for the BASE year, then ______ .

current physcial output is larger than in the base year

One family earned an income of $40,000 in 1995. Over the next year, their dollar income increased to $44,000, while the CPI increased by 12%. Over that next year, this family's nominal income ______ and the family's real income ______.

increased; decreased

If prices in an economy decrease by 3% in the same year the quantity of goods and services produced by the economy increases by 1%, nominal GDP ______ and real GDP ______ .

decreases; increases

The labor force, as defined by the U.S. government, is the total of _____ .

employed and unemployed

According to the article, Yellen said the Federal Open Market Committee discussed the possibility of raising rates at this week's meeting, but decided not to in light of the heightened uncertainties abroad and the much higher expected path for inflation.

false

According to the article, while she held out the possibility of the Fed raising rates at its next meeting in October, economists and traders weren't buying it. The odds of a move next month are only about one in _____, according to dealings in the fed funds futures market.

five

Which choice is a structural policy action?

government development of new property rights

The value of milled grain, grown and processed in Brazil, that is sold and delivered to a U.S. bakery, which then sells the resulting bread to a U.S. supermarket, which then sells the bread to a consumer ______ .

is counted indirectly in U.S. consumption expenditures as part of the value of the bread, but does not change U.S. GDP

The relatively best example of an economic aggregate is the _____ .

level of government spending

A family hires a lawn-mowing service rather than mowing the lawn themselves. The quality of the mowing is the same with the service as with the family. As a result of this transaction ____.

measured GDP rises, but the true output of the economy does not change

In Econland, a college graduate in 1989 found a job paying $48,000 per year. The Econland CPI was 160 in 1989. A college graduate in 2003 found a job paying $60,000 per year. The CPI was 200 in 2003. The 2003 graduate's job paid ____ in nominal terms and ______ in real terms.

more; the same

Which of the following expenditure components of GDP can be negative?

net exports

The government expenditure component of GDP includes _____.

payments of salaries to school teachers

A measure of GDP in which valuation is at base year prices is called ______.

real GDP

Adding up the market values of all final goods and services produced will result in the same answer as _____.

summing the value added of all firms in the economy

The money supply should increase when ______.

the Fed reduces reserve requirements

According to the article, "We are looking at, as I emphasized, a U.S. economy that has been performing well and impressing us by the pace at which it is creating jobs and the strength of domestic demand," Yellen said.

true

According to the article, in Yellen's view of the world, wage increases -- and inflation -- should start to accelerate as _____ further and further.

unemployment falls