Econ Exam I

For renters, consumption includes

rent payments

Investments include

spending on capital equipment (machines), structures (buildings), inventories (goods produced but not yet sold)

GDP includes

tangible goods and intangible services

Real GDP per capita is the main indicator of

the average person's standard of living

Intermediate Goods

Used as components or ingredients in the production of other goods (cheese, sauce in pizza)

What are the 4 components of gDP?

consumption, investment, govt purchases, net exports

Firms

* buy/hire factors of production, use them to produce goods and services * sell goods and services

Real interest rate

* corrected for inflation * the rate of growth in the purchasing power of a deposit or debit

Households

* own the factors of production and sell/rent them to firms for income * buy and consume goods and services

Circular Flow Diagram

* simple depiction of the macroeconomy * illustrates GDP as spending, revenue, factor payments, income

Nominal interest rate

* the interest rate NOT corrected for inflation * the rate of growth in the dollar value of a deposit or debit

The CPI probably still overstates inflation by about:

0.5 percent per year

The CPI in any year equals

100 x cost of basket in current year/cost of basket in base year

GDP deflator formula

100 x nom GDP/real GDP

Market value

All goods measured in the same units

The percentage change in the CPI from the last period is

CPI this year - CPI last year/CPI last year x 100

Introduction of New Goods

Consumers find new products that meet their needs more closely. In effect, dollars become more valuable. The CPI misses this because it uses a fixed basket

Investment from abroad: A. Increases the stock of capital and therefore can increase productivity B. Causes some of the income earned from the investment to exit the country C. Can bring new technologies to poorer countries D. All these choices

D. All these choices

Why does income equal expenditure?

Every dollar a buyer spends is a dollar of income for the seller

Net exports formula

Exports - Imports

What does the circular diagram omit?

Govt (collects taxes, buys g&s) Financial system (matches savers' supply of funds with borrowers' demand for loans) Foreign Sector (trades g&s, financial assets, and currencies with country's residents)

Unmeasured Quality Change

Improvements in the quality of goods in the basket increase the value of each dollar. The BLS tries to account for quality changes but probably misses some, as quality is hard to measure

Imported consumer goods are

Included in the CPI but excluded from the GDP deflator

Factors of production

Inputs, such as labor, land, capital and natural resources

Real Interest Rate formula

Nominal interest rate - inflation rate

Factor payments

Payments to the factors of production (wages, rent)

What are the three main problems with the CPI?

Substitution Bias, introduction of new goods, unmeasured quality change

Substitution Bias

The CPI misses substitution towards cheaper goods because it uses a fixed basket of goods

GDP only includes ______________ ______________

currently produced goods

When a country saves a larger portion of its GDP, it will have a. more capital and higher productivity. b. more capital and lower productivity. c. less capital and higher productivity. d. less capital and lower productivity.

a. more capital and higher productivity.

Suppose that a new government is elected in Tempestia. The new government takes steps toward improving the court system and reducing government corruption. The citizens of Tempestia find these efforts credible and outsiders believe these changes will be effective and long lasting. These changes will probably a. raise real GDP per person and productivity in Tempestia. b. raise real GDP per person but not productivity in Tempestia. c. raise productivity but not real GDP per person in Tempestia. d. raise neither productivity nor real GDP per person in Tempestia.

a. raise real GDP per person and productivity in Tempestia.

The supply of loanable funds slopes a. upward because an increase in the interest rate induces people to save more. b. downward because an increase in the interest rate induces people to save less. c. downward because an increase in the interest rate induces people to invest less. d. upward because an increase in the interest rate induces people to invest more.

a. upward because an increase in the interest rate induces people to save more.

Govt purchases

all spending on the g&s purchased by govt

If the demand for loanable funds shifts left, the equilibrium interest rate a. and quantity of loanable funds rise. b. and quantity of loanable funds fall. c. rises and the quantity of loanable funds falls. d. falls and the quantity of loanable funds rises.

b. and quantity of loanable funds fall.

Susan switches from going to Speedy Lube for an oil change to changing the oil in her car herself. Which of the following is correct? The value of changing the oil is a. included in GDP whether Susan pays Speedy Lube to change it or changes it herself. b. included in GDP if Susan pays Speedy Lube to change it but not if she changes it herself. c. included in GDP if Susan changes it herself, but not if she pays Speedy Lube to change it. d. not included in GDP whether Susan pays Speedy lube to change it or she changes it herself.

b. included in GDP if Susan pays Speedy Lube to change it but not if she changes it herself.

A nation's standard of living is determined by a. its productivity. b. its gross domestic product. c. its national income. d. how much it has relative to others.

b. its gross domestic product.

Changes in real GDP reflect a. only changes in prices. b. only changes in the amounts being produced. c. both changes in prices and changes in the amounts being produced. d. neither changes in prices nor changes in the amounts being produced.

b. only changes in the amounts being produced.

GDP deflator uses

basket of currently produced goods and services

An American company operates a fast food restaurant in Paris, France. Which of the following statements is accurate? a. The value of the goods and services produced by the restaurant is included in both French GDP and U.S. GDP. b. The value added by American workers and equipment in France is included in U.S. GDP and the value added by French workers and equipment is added to French GDP. c. The value of the goods and services produced by the restaurant is included in French GDP, but not in U.S. GDP. d. The value of the goods and services produced by the restaurant is included in U.S. GDP, but not in French GDP.

c. The value of the goods and services produced by the restaurant is included in French GDP, but not in U.S. GDP.

Which of the following statements about GDP is correct? a. GDP measures two things at once: the total income of everyone in the economy and the unemployment rate of the economy's labor force. b. Money continuously flows from households to government and then back to households, and GDP measures this flow of money. c. GDP is to a nation's economy as household income is to a household. d. All of the above are correct.

c. GDP is to a nation's economy as household income is to a household.

Changes in nominal GDP reflect a. only changes in prices. b. only changes in the amounts being produced. c. both changes in prices and changes in the amounts being produced. d. neither changes in prices nor changes in the amounts being produced.

c. both changes in prices and changes in the amounts being produced.

Which of the following is included in GDP? a. the market value of rental housing services, but not the market value of owner-occupied housing services. b. the market value of owner-occupied housing services, but not the market value of rental housing services c. both the market value of rental housing services and the market value of owner-occupied housing services d. neither the market value of owner-occupied housing services nor the market value of rental housing services.

c. both the market value of rental housing services and the market value of owner-occupied housing services

Thomas, a U.S. citizen, works only in Canada. The value of the output he produces is a. included in both U.S. GDP and U.S. GNP. b. included in U.S. GDP, but it is not included in U.S. GNP. c. included in U.S. GNP, but it is not included in U.S. GDP. d. included in neither U.S. GDP nor U.S. GNP.

c. included in U.S. GNP, but it is not included in U.S. GDP.

When the government runs a budget deficit, a. interest rates are lower. b. national saving are higher. c. investment is lower. d. All of the above are correct.

c. investment is lower.

The logic behind the catch-up effect is that a. workers in countries with low incomes will work more hours than workers in countries with high incomes. b. the capital stock in rich countries deteriorates at a higher rate because it already has a lot of capital. c. new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital. d. None of the above is correct.

c. new capital adds more to production in a country that doesn't have much capital than in a country that already has much capital.

Exports represent

foreign spending on the economy's g&s

10. In the base year, the GDP deflator is always a. -1. b. 0. c. 1. d. 100.

d. 100.

Both Tom and Jerry work eight hours a day. Tom can produce six baskets of goods per hour while Jerry can produce four baskets of the same goods per hour. It follows that Tom's a. productivity is greater than Jerry's. b. output is greater than Jerry's. c. standard of living is higher than Jerry's. d. All of the above are correct.

d. All of the above are correct.

Which of the following is consistent with the catch-up effect? a. The United States had a higher growth rate before 1900 than after. b. After World War II the United States had lower growth rates than war-ravaged European countries. c. Although the United States has a relatively high level of output per person, its growth rate is rather modest compared to some countries. d. All of the above are correct.

d. All of the above are correct.

Which of the following is included in the consumption component of GDP? a. household purchases of appliances. b. household purchases of medical care. c. household purchases of food. d. All of the above are included in the consumption component of GDP.

d. All of the above are included in the consumption component of GDP.

20. From 1960 to 1998 real GDP per capita grew by a factor of 2.5 in the United States and by a factor of 10 in Korea. Which of the following best explains why Korea experienced faster growth than the United States? a. Korea protected domestic companies by making international trade illegal. b. Prices in Korea increased much more rapidly than in the United States. c. The population of Korea increased at a faster rate than in the United States. d. At the start of the comparison, 1960, Korea was much poorer than the United States.

d. At the start of the comparison, 1960, Korea was much poorer than the United States.

13. The consumer price index (CPI) and the GDP deflator are two alternative measures of the overall price level. Which of the following statements about the two measures is correct? a. The CPI involves a base year; the GDP deflator does not involve a base year. b. The CPI can be used to compute the inflation rate; the GDP deflator cannot be used to compute the inflation rate. c. The CPI reflects the prices of goods and services produced domestically; the GDP deflator reflects the prices of all goods and services bought by consumers. d. The CPI reflects a fixed basket of goods and services; the GDP deflator reflects current production of goods and services.

d. The CPI reflects a fixed basket of goods and services; the GDP deflator reflects current production of goods and services.

If there are diminishing returns to capital, a. capital produces fewer goods as it ages. b. new ideas are not as useful as old ideas. c. increases in the capital stock eventually decrease output. d. increases in the capital stock increase output by ever smaller amounts.

d. increases in the capital stock increase output by ever smaller amounts.

The basket that the CPI and GDP deflator uses matters if

different prices are changing by different amounts

Intangible services examples

dry cleaning, concerts

GDP does not value

environment quality, leisure time, non-market activity, equitable distribution of income

Capital goods are

excluded from the CPI but included in the GDP deflator if produced domestically

GDP only includes __________ goods

final

CPI uses a

fixed basket

Many firms are purchased by

households

For homeowners, consumption includes

imputed rental value of the house

Final goods

intended for the end user

CPI is the basis of cost of living adjustments in:

many contracts and in social security

GDP is important because

many indicators of quality of life are positively correlated with GDP

GDP is

market value of all final goods and services produced within a country in a given time period

GDP deflator

measure of the overall level of prices

What does the CPI measure?

the typical consumer's cost of living

GDP measures

total income of everyone in the economy and total expenditure on the economy's output of goods and services

Consumption

total spending by household goods

Investment

total spending on goods that will be used in the future to produce more goods

Govt purchases exclude

transfer payments, such as SS or unemployment

Nominal GDP

values output using current prices, not corrected for inflation

Real GDP

values output using the prices of a base year and is corrected for inflation