ECON 401 Midterm (Chapters 4, 5, 6 & 7)
Higher corporate profit taxes stimulate capital formation in the private sector. a. True b. False
false
Some hotels in Myrtle Beach, South Carolina charge over $200 a night in the summer but sometimes as little as $99 a night in the winter. Use supply and demand analysis, including graphical and verbal explanation, for these winter "sales."
A sample graph is shown (Figure 4-26). Demand falls in the winter, so that equilibrium price decreases with the supply unchanged resulting in a shift of demand to the left and a lower price and quantity in winter months.
A demand schedule shows the time over which different quantities will be demanded. a. True b. False
False
Change in the price of a good causes the demand schedule for that good to shift. a. True b. False
False
What is gross domestic product? What is included in this statistic? What is excluded? Give two examples of goods or services that are included in GDP and two examples of goods or services that are excluded.
Gross domestic product (GDP) is an aggregate and therefore an abstraction. It is the sum of the money values of all final goods and services produced in the domestic economy during a specific time period, usually a calendar quarter or year. GDP excludes goods and services produced in another quarter or year and it excludes intermediate goods and services. It includes final goods and services produced in the United States, regardless of the ownership of the facility producing the goods or services. It excludes goods and services produced outside the United States, even if they are produced by subsidiaries or branches of U.S. firms. GDP includes only goods and services that are bought and sold in organized markets. Examples of items included in GDP are anything newly produced in the specified time period. It is important that the item be produced in the period and not "new" items that may have been in storage or inventory for a long time before being sold. Items excluded from GDP are any intermediate good or service, any used good, any good or service produced outside the United States, and any good or service that does not pass through an organized market.
Several countries in the world have failed to "converge" with industrialized countries. What does this mean about their economic growth rates? Explain why poorer countries have failed to "catch up," in terms of the pillars of economic growth. Are there any special problems facing these countries?
If a poor country fails to converge, this means that its economic growth is either equal to or less than that of the industrialized nations. If a country grows at the same rate, then it will never "catch up." If it grows at a slower rate, then the gap between poor country and the industrialized countries will widen over time.Poor countries struggle in terms of capital formation, technological progress, and labor quality —limiting growth in labor productivity. Capital formation is difficult because poorer countries tend to have populations that live at subsistence level and are therefore unable to save. While foreign direct investment from multinational corporations may encourage capital formation and technological advancement, many poor countries may resent, or even block, the entry of these foreign businesses. In addition, these multinational corporations may not be interested in investing in poorer countries because these countries often lack skilled labor. Finally, educational attainment is significantly lower in poorer countries—often with portions of the population (women and ethnic minorities) receiving little or no education at all. With rudimentary skills, such as reading and writing, labor quality suffers.Poorer countries may also suffer from special problems related to geography, health, and governance. These issues cannot be resolved through making economic choices alone. For example, a country with access to many different resources (e.g., the Unite States) is better able to encourage capital formation and technological progress than one that is resource poor. Lack of health care and exposure to disease and epidemic severely hinder labor quality. Finally, without political stability, it is difficult to encourage businesses to invest in physical capital or innovations necessary to spur economic growth.
Explain the effect of the following changes on equilibrium price and quantity of a commodity: (a)increase in average incomes. (b)increase in population.
If average incomes rise, consumers will purchase more of most goods. That is, increases in income normally shift demand curves outward to the right. The equilibrium price and quantity both rise. These are goods characterized as "normal goods."A larger population will presumably want to consume more of a commodity, even if the price of that commodity and average incomes do not change, thus shifting the entire demand curve to the right. The equilibrium price and quantity both rise.
Define and distinguish between real and nominal GDP. Explain why the distinction is important to economists.
Real GDP (or GDP in constant dollars) is a measure of the output of final goods and services produced in the domestic economy during a specific time period. It measures output in dollars of constant value. Therefore, it corrects for the effects of inflation. Real GDP will increase if there is an increase in the actual output of goods and services, such as more automobiles, more computers, more Internet access time, or more new economic textbooks. Nominal GDP (or GDP in current dollars, or money GDP) is a measure of output of final goods and services at current prices produced in the domestic economy during a specific time period. It measures final sales using dollars of current (noninflation corrected) spending power. It can increase because of an increase in real output or because of an increase in the prices of final goods and services. Economists use real GDP as a more accurate measure of the true state of the economy, in that it tells us whether there are more or fewer actual final goods and services in the economy. Nominal GDP can be misleading in this regard. An example of this is the case of stagflation; rising prices, combined with falling output of final goods and services, may result in rising nominal GDP and falling real GDP. The decrease in real GDP is a better indicator of the sluggish economy.
Explain the ways in which the government can persuade private businesses to invest more in order to speed up the process of capital formation?
Real interest rates: The amount that businesses invest depends on the real interest rate they pay to borrow funds. The lower the real rate of interest, the more investment there will be.Tax provisions: The government also can influence investment spending by altering provisions of the tax code.Technical change: If the government can figure out how to spur technological progress, those same policies will probably boost investment. Growth of demand: Rapid growth itself can induce businesses to invest more. High levels of sales and expectations of rapid economic growth create an atmosphere conducive to investment.Political stability and property rights: Business executives contemplating a long-term investment want assurances that their property will not be taken from them for capricious or political reasons.
Why do price levels increase when government adopts fiscal or monetary policy to correct the economy when it faces a recession and high unemployment?
Recession and unemployment are often caused by insufficient aggregate demand. Policy makers can use monetary and fiscal policy tools to stimulate aggregate demand during recession. The aggregate demand curve will shift to right leading to an increase in general price levels.
What is convergence hypothesis? Why should we expect convergence in the long run?
The convergence hypothesis holds that nations with low levels of productivity tend to have high productivity growth rates, so that international productivity differences shrink over time. In some poor countries, the supply of capital may be growing very rapidly. In others, educational attainment may be rising quickly, albeit from a low base. But the main reason to expect convergence in the long run is that low-productivity countries should be able to learn from high-productivity countries as scientific and managerial know-how spreads around the world.
Show graphically the effect of technological advance on the price of music downloads. In a separate graph, show what happens to the price of CDs as a secondary effect of the new download technology.
The first graph shows a rightward shift of the supply of downloads as a result of change in technology, so that the price of downloads falls while equilibrium quantity increases (Figure 4-27). This causes a decrease in the demand for CDs, reducing price and quantity at equilibrium.
Distinguish between real rate of interest and nominal rate of interest.
The real rate of interest is the percentage increase in purchasing power that the borrower pays to the lender for the privilege of borrowing. It indicates the increased ability to purchase goods and services that the lender earns.The nominal rate of interest is the percentage by which the money the borrower pays back exceeds the money that was borrowed, making no adjustment for any decline in the purchasing power of this money that results from inflation.
How is the unemployment rate calculated? Describe the three principal types of unemployment.
The unemployment rate is a percentage obtained by dividing the number of persons classified as unemployed by the number of persons in the labor force. Unemployed persons are those individuals who are out of work and actively looking for work. The labor force is the sum of those counted as unemployed and those persons counted as employed. Employed persons are those at work, full- or part-time, during the week in which the employment survey data are collected by the Department of Labor.The three principal types of unemployment are frictional, structural, and cyclical unemployment. Frictional unemployment occurs when persons are between jobs. Workers may be between jobs because they have quit one job and are searching for something more suitable, or because they are moving to a different region of the country, or they are moving from a declining industry to a growing industry. Structural unemployment is sometimes referred to as long-term unemployment or technological unemployment. Structurally unemployed workers have skills that are outdated or were working in jobs that are now done by some type of automated machinery. These unemployed workers may need retraining or additional education to prepare themselves for new careers. Structural unemployment is particularly difficult for older workers who may not have sufficient time to learn new skills before they reach retirement age. Cyclical unemployment is often referred to as a recession unemployment and is a focus of macroeconomic theory. Cyclical unemployment is created when the economy is not producing at its potential level of GDP. Government aggregate demand management policies are often effective in reducing cyclical unemployment.
Are there key differences between an increase in the capital stock and an improvement in the level of technology?
There is no significant difference to an economy between an increase in the capital stock and an improvement in the level of technology. From a graphical perspective, both changes will shift the production function upward, indicating an increase in output with the same level of labor. In terms of productivity, both of these changes increase the productivity of labor, the key variable in determining the economy's standard of living.
"Equilibrium" is a situation in which there are no inherent forces to produce change. a. True b. False
True
As price increases, additional suppliers are willing to produce a commodity. a. True b. False
True
At equilibrium, the market will clear, with no surpluses or shortages occurring. a. True b. False
True
Changes in the size of an industry may cause supply to shift. a. True b. False
True
If the price of hamburger rises, we would expect the demand for steak to shift to the right. a. True b. False
True
Scarcity and choice are the basic problems of economics; the supply and demand mechanism is the basic investigative tool of economics. a. True b. False
True
When price is below the equilibrium level, there is a shortage of the commodity being sold. a. True b. False
True
Which of the following groups would most likely to benefit from inflation? a. Borrowers b. Lenders c. Creditors d. Pensioners
a. Borrowers
Identify the main reason to expect convergence in the long run. a. Low-productivity countries learning from high-productivity countries b. Rapid growth in the supply of capital in low-productivity countries c. Educational attainment rising quickly in low-productivity countries d. Economic complacency and mismanagement in high-productivity countries
a. Low-productivity countries learning from high-productivity countries
Full employment is defined by most economists as the minimization of a. cyclical unemployment. b. frictional unemployment. c. seasonal unemployment. d. structural unemployment.
a. cyclical unemployment.
The primary use of development assistance is to a. encourage economic development through low-interest loans. b. restrict the outflow of foreign direct investment. c. invest in natural resources. d. allow developing countries imitate rather than innovate technologies.
a. encourage economic development through low-interest loans.
Policy should create an environment in which the economy can expand its productive capacity rapidly, because that is the ultimate source of higher living standards. This task is the realm of a. growth policy. b. stabilization policy. c. labor policy. d. inflation policy.
a. growth policy.
Higher steel prices will result in a shift in the supply curve of bicycles, and this will lead to a. higher prices for bicycles. b. lower prices for bicycles. c. a shift in the demand curve for bicycles. d. a larger output of bicycles.
a. higher prices for bicycles.
The clearest sign of inflation would be a(n) a. increase in the price level. b. increase in the quantity of total final output. c. decrease in the quantity of total final output. d. simultaneous increase in both output and prices.
a. increase in the price level.
If a macroeconomist aggregates many markets into one, then a. individual market differences are eliminated. b. one must not confuse ravioli and hotdogs. c. she is performing a meaningless exercise. d. differences between products must still be noted.
a. individual market differences are eliminated.
Potential GDP is an estimate of the economy's ability to produce goods and services if the a. labor force is fully employed. b. price level is stable. c. trade balance is zero. d. federal budget is balanced.
a. labor force is fully employed.
Unstable property rights will usually cause a. lower levels of investment spending. b. lower levels of real interest rates. c. higher levels of investment spending. d. higher levels of real interest rates.
a. lower levels of investment spending.
If actual inflation is greater than the expected rate of inflation, then probably a. the borrowers are made better off than lenders. b. the borrowers are made worse off than lenders. c. creditors gain at the expense of borrowers. d. savings accounts have increased in real terms.
a. the borrowers are made better off than lenders.
In Figure 5-2, if the aggregate demand curve moves to the right less rapidly than the aggregate supply curve, then a. the price level should decline over time. b. the price level should remain stable. c. the price level will tend to increase. d. the level of real GDP should decrease.
a. the price level should decline over time.
Grapes can be used to produce wine or raisins. Which graph in Figure 4-6 best depicts the effects on the U.S. raisin market of a decline in purchases of domestic wine? a. 1 b. 2 c. 3 d. 4
b. 2
Which graph in Figure 5-3 best represents the aggregate demand-induced Great Depression of the 1930s?a. 1 b. 2 c. 3 d. 4
b. 2
If wages rise by 12 percent at the same time prices rise by 3 percent, then the increase in real wages is equal to a. 12 percent. b. 9 percent. c. 6 percent. d. 3 percent.
b. 9 percent.
Which of the following changes would not result in a shift in the demand curve for milk? a. A change in the income of buyers of milk b. A change in the price of milk c. A change in the population d. A medical report that milk consumption increases cholesterol.
b. A change in the price of milk
Poor Asian countries may have per capita GDPs that may be less than $250. Why is this somewhat misleading for comparative purposes? a. Most rich country's GDP is nonmarket activity. b. A significant amount of poor country's GDP is nonmarket activity. c. Poor countries do not use dollars. d. Poor countries have few resources.
b. A significant amount of poor country's GDP is nonmarket activity.
Assume that Figure 4-16 shows the supply of steak. An increase in the price of cattle feed will change the supply from a. S1 to S2. b. S2 to S1. c. S2 to S3. d. S1 to S3
b. S2 to S1.
The supply curve of books (which are produced using paper made from trees) will shift to the left in response to a. a decline in college tuition. b. an increase in home building. c. an increase in the supply of lumberjacks. d. an end to government regulations that limit timber harvesting in national forests.
b. an increase in home building.
Newspaper recycling has been highly successful—perhaps too successful, given that many households gather and return their newspapers to recycling centers. The amount of newspapers recycled has dramatically increased, along with the number of recycling plants. Yet newspapers prefer regular newsprint over recycled newsprint, so the demand for recycled newsprint has remained essentially unchanged. The result of this for the recycled newsprint market is a. a decrease in the supply and a higher price for recycled newsprint. b. an increase in the supply and a lower price for recycled newsprint. c. an increase in the supply and a higher price for recycled newsprint. d. a decrease in the supply and an increase in the demand for recycled newsprint.
b. an increase in the supply and a lower price for recycled newsprint
In general, as the amount of labor input decreases, the amount of output a. increases. b. decreases. c. remains constant. d. decreases only if the capital stock also decreases.
b. decreases.
If the price of oil, a close substitute for coal, increases then the a. supply curve for coal will shift to the right. b. demand curve for coal will shift to the right. c. equilibrium price and quantity of coal will not change. d. demand curve for coal will shift to the left.e. supply curve of coal will shift to the left.
b. demand curve for coal will shift to the right.
In 1966, the Catholic Church eliminated the centuries-old requirement that members abstain from eating meat on Fridays. Catholics customarily ate fish on Friday. Following the removal of this requirement, it was found that the a. demand curve for fish shifted to the right. b. demand curve for fish shifted to the left. c. demand for meat decreased. d. price of fish increased.
b. demand curve for fish shifted to the left.
The main cost that low inflation imposes on an economy is that low inflation a. inevitably leads to high inflation. b. distorts some economic decisions. c. reduces real wages. d. benefits lenders at the expense of borrowers.
b. distorts some economic decisions.
Countries that adopt the most advanced technologies will have a. stagnant labor productivity. b. highly productive labor and capital. c. decreasing profitability. d. constant returns to scale.
b. highly productive labor and capital.
The term "stagflation" was invented in the 1970s to describe an economy experiencing both a. deflation and economic stagnation. b. inflation and economic stagnation. c. high inflation and high employment. d. high inflation and high levels of economic growth.
b. inflation and economic stagnation.
The federal government collects taxes on a. real capital gains. b. nominal capital gains. c. real capital losses. d. nominal capital losses.
b. nominal capital gains.
If the labor force grows faster than the number employed, the a. unemployment rate will fall. b. unemployment rate will rise. c. labor force rate will rise. d. employment rate will rise.
b. unemployment rate will rise.
Gladys agrees to lend Kay $1,000 for one year at a nominal rate of interest of 5 percent. At the end of the year prices have actually risen by 7 percent. a. Gladys earns extra real income. b. Kay loses extra real income. c. Kay receives extra real income. d. Neither party gains or loses if the loan is repaid.
c. Kay receives extra real income.
The unemployment rate is the number of unemployed people, expressed as a. a ratio of total employed to the population. b. a ratio of unemployed to the total employed. c. a percentage of the labor force. d. a percentage of the population.
c. a percentage of the labor force.
In Figure 4-18, there would be a shortage of T-shirts if the price were a. $10 and the market price will rise. b. $8 and the market will tend toward equilibrium. c. below $8 and the shortage persists. d. between $8 and $6 and the shortage will get larger.
c. below $8 and the shortage persists.
If the capital stock increases, then the economy can produce ____ output with the ____ amount of labor. a. same, same b. less, same c. more, same d. less, less
c. more, same
The major difference between nominal GDP and real GDP is that a. real GDP is the absolute value of goods and services and nominal GDP is a relative value. b. real GDP refers to products made in the United States and nominal GDP refers to both exports and imports. c. nominal GDP is the market value and real GDP has been adjusted for inflation. d. real GDP is a relative value and nominal GDP is an absolute value.
c. nominal GDP is the market value and real GDP has been adjusted for inflation.
The profitability of an investment project will increase if a. tax rates increase. b. real interest rates increase. c. real interest rates decrease. d. business tax deductions decrease.
c. real interest rates decrease.
Gross domestic product is best described as the a. measure of a nation's total economic welfare. b. national income, including nonmarket income. c. sum of money values of all final output produced in the domestic economy within the year. d. national output minus environmental damage.
c. sum of money values of all final output produced in the domestic economy within the year.
If hotdogs cost $2 this year and $3 next year, then 100 hotdogs will contribute a. $200 to this year's nominal GDP and $166 to next year's nominal GDP. b. $200 to this year's real GDP and $300 to next year's real GDP. c. the same dollar amount to each year's nominal GDP because hotdogs are intermediate goods. d. $200 to this year's nominal GDP and $300 to next year's nominal GDP.
d. $200 to this year's nominal GDP and $300 to next year's nominal GDP.
Why does the quantity demanded decrease when the price of a good increases? a. People choose to reduce consumption of the item. b. People "drop out" of the market for the item. c. People find substitutes for the item. d. All of these responses are correct
d. All of these responses are correct
Which furniture production process would have the highest production function? a. Furniture made by handsaw and hammer b. Furniture made with power equipment c. Furniture with a mix of handmade and automated labor d. Furniture made in an automated furniture factory
d. Furniture made in an automated furniture factory
To fight inflation, the government may a. decrease aggregate demand, which will also lead to lower unemployment rates. b. increase aggregate demand, which will also lead to lower unemployment rates. c. increase aggregate demand, which will also lead to higher unemployment rates. d. decrease aggregate demand, which will also lead to higher unemployment rates.
d. decrease aggregate demand, which will also lead to higher unemployment rates.
If a larger percentage of Americans attended college, the wage premium would probably a. continue rising. b. continue falling. c. rise. d. fall.
d. fall.
If aggregate demand shifts outward over a long period of time, with aggregate supply held constant, the economy should experience a. unemployment. b. recession. c. budget surpluses. d. inflation.
d. inflation.
Labor productivity is calculated by dividing GDP by a. population. b. the price level. c. capital stock d. labor force.
d. labor force
An increase in the number of hours worked would a. shift the production function upward. b. shift the production function downward. c. shift the production function outward. d. not shift the production function.
d. not shift the production function.
A decrease in the price of gasoline shifts the demand for auto batteries to the a. left, because gasoline and auto batteries are substitutes. b. left, because gasoline and auto batteries are normally used together. c. right, because gasoline and auto batteries are substitutes. d. right, because gasoline and auto batteries are normally used together.
d. right, because gasoline and auto batteries are normally used together.
Martha was a grocery store clerk a local supermarket, until her job was replaced by self-checkout machines and the rise of online grocery deliveries. Show now must be trained for a completely new profession. Martha is experiencing a. cyclical unemployment. b. seasonal unemployment. c. frictional unemployment. d. structural unemployment.
d. structural unemployment.
Usually, increased government spending for war increases inflationary pressures. The principal reason that inflation occurred during the Vietnam War and not during World War II was the existence, during World War II, of a. full employment. b. government ownership of factories. c. full production. d. wage and price controls. e. high levels of patriotism.
d. wage and price controls.
During economic fluctuations, individual markets usually move in different directions. a. True b. False
false
For a given technology, a higher capital stock will decrease labor productivity. a. True b. False
false
Gross domestic product includes the sale of intermediate goods and services. a. True b. False
false
Human capital includes the tools and equipment that human beings work with. a. True b. False
false
Improvements in the level of technology will generally shift the production function downward. a. True b. False
false
Taxes on capital gains and interest decline as inflation rates increase. a. True b. False
false
Technological change and labor productivity are negatively related. a. True b. False
false
The existence of the "underground economy" causes measured GDP to overestimate actual output. a. True b. False
false
A superior level of technology is an important reason the productivity of workers in rich countries is high. a. True b. False
true
According to the convergence hypothesis, as a country grows wealthier, its productivity growth rate will slow down. a. True b. False
true
Foreign direct investment generally leads to technological advancements in poorer countries. a. True b. False
true
Frictional unemployment will typically be a short-term problem for someone between jobs. a. True b. False
true
Imitation, rather than innovation, is a way for poorer countries to achieve growth. a. True b. False
true
In macroeconomics, the vertical axis in a supply-demand model measures the price level rather than a particular product's price. a. True b. False
true
Nominal GDP includes the current value of services produced in the economy. a. True b. False
true
Real wages more accurately reflect the payment to labor because they are adjusted for the effects of inflation. a. True b. False
true
Small differences in economic growth rates translate into significant differences in living standards. a. True b. False
true
Technological breakthroughs, such as the Internet, can be shown with a rightward shift of the aggregate supply curve. a. True b. False
true
The key characteristic of macroeconomics is the process of aggregation. a. True b. False
true
The production function shifts upward as the capital stock increases. a. True b. False
true
Two of the most important macroeconomic issues are unemployment and inflation. a. True b. False
true
When the Art Institute of Chicago purchases a painting by Mary Cassatt that she produced in Paris in 1885, this would not be included in the U.S. GDP for 2015. a. True b. False
true
When the economy devotes more of its resources to investment goods, it must devote fewer resources to consumer goods. a. True b. False
true
When the expected inflation rate equals the actual inflation rate, the real interest rate was accurately estimated. a. True b. False
true
