Economics Exam 2

An economy has $10 trillion in consumption, $2.5 trillion in investment, $3 trillion in government purchases, $1 trillion in exports, and $1.5 trillion in imports. What is GDP in this economy?

$15 trillion

If U.S. per capita GDP is $50,000 and grows at 3% per year, what will U.S. per capita GDP be in 70 years?

$400,000

(Table: Prices and Quantities in a 4-Good Economy) Suppose an economy produces only the four goods listed in this table. All of the country's tomatoes are used in the production of pizzas. What is the GDP in this country?

$7,200

Which statement is TRUE about economic growth?

A country can grow and become wealthy, never grow, or grow and then begin to stagnate.

How might changes in the money supply be non-neutral in the short run?

As the amount of money circulating in the economy changes before prices respond, the purchases of consumers change accordingly, which leads producers to change production levels.

Which of the following best describes the conditions during the Great Depression?

Both real GDP growth and inflation were negative.

If the GDP of country X is 4 times the GDP of country Y and if the GDP of country X remains constant while GDP of country Y grows at a rate of 7% per year, which of the following statements is true?

Country Y's GDP will be equal to country X's GDP in 20 years

In the short run, a decrease in consumption growth will cause the real GDP growth to:

Decrease

What happened to the price level between 1929 and 1932?

Deflation reached 10%.

Which of the following statements is TRUE about GDP?

GDP does not account for the distribution of income in a country.

In nations that have large underground, or illegal, sectors:

GDP will underestimate total production in the economy.

In the United States, federal government expenditures must be approved by the:

House of Representatives, the Senate, and the president of the United States

Which two nations have a high percentage of older workers participating in the labor force?

Japan and the United States

How might changes in marginal tax rates on married couples affect labor force participation rates?

Lower marginal tax rates on married couples encourage higher labor force participation rates by the secondary income earner.

Which of the following would NOT be included in GDP for the United States?

Matt purchasing an antique desk for his new home office

Since people will always come to expect the actual inflation rate in the long run, the expected inflation rate is found graphically where the:

SRAS curve intersects the LRAS curve.

A country's total civilian noninstitutionalized adult population is 1 million, and 500,000 people in this country are working, with another 20,000 people looking for work. Which of the following statements about the labor force statistics in this country is accurate?

The employment rate is 96.15% and the labor force participation rate is 52%.

Which of the following would be included in GDP for the United States?

Toyota, a Japanese car company, producing cars in the United States

Which of the following is part of the labor force?

a person who was laid off and is now looking for work

According to the AD -AS model, if the economy is initially at its long-run potential growth rate, then a temporary increase in the growth rate of investment spending will cause:

an increase in both the inflation and real growth rates in the short run

Sustained inflation:

an occur as a result of changes in i.

President Obama's fiscal policy response to the 2008 recession involved changes in:

both taxation and government spending.

Final goods are goods:

consumed or held in personal inventories

One way the government can use fiscal policy to fight a recession is to:

cut taxes

As the baby boomers retire, the United States labor force participation rate will:

decrease

As the recession continued in early 2009, consumer confidence most likely:

decreased

If you earned $10-an-hour in 2005 when the CPI was 100, and you earn $11-an-hour today when the CPI is 120, then your real wage rate has _____ since 2005.

decreased

High and volatile inflation:

destroys the ability of market prices to send signals about the value of resources and opportunities.

Under communal property, effort is:

divorced from payment, so there is little incentive to work

An unemployed person is one who:

does not have a job but is actively looking for one.

Gross domestic product is the market value of all:

final goods and services produced within a country in a year.

Political stability _____ economic growth.

fuels

Suppose you spent $10,000 in 2010 remodeling your house, which you originally built for $200,000 in 2000. As a result, GDP in 2010 would:

increase by $10,000

Assuming the velocity of money and real GDP are fixed, the quantity theory of money predicts that a 2% increase in the money supply causes a 2%:

increase in the average price level.

Higher unemployment benefits tend to:

increase the unemployment rate

When workers lose their jobs and become officially unemployed, the number of people in the labor force:

increases

In the basic model that includes the AD and LRAS curves only, an increase in aggregate demand

increases the inflation rate, but not the growth rate.

Refer to the figure. Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD 1 to AD 4, then the government can avoid a short-run increase in inflation by:

increasing taxes so that the AD curve shifts back to AD 1.

As a result of a positive shock to C:

inflation and output growth increase in the short run, but in the long run they return to the rates before the shock.

Two thousand years ago, per capita GDP (in 2010 dollars) was:

less than $1,000.

If the economy experiences unexpected inflation, then the real interest rate will be _____ than its equilibrium rate, and wealth will be distributed from _____.

less; lenders to borrowers

A legal system that helps raise a nation's productivity is one that:

makes it easy for people to engage in contracts and to establish property rights

U.S. farms today produce _____ output using _____ land as they did in 1950

more; less

Beginning in the _____ century, economic growth became a clear trend in parts of the world.

nineteenth

increases in real GDP are considered the best measure of increases in living standards, because they measure:

only increases in production.

When economists speak of "long-run economic growth," they mean increasing the:

per capita real GDP of a country.

Farmers who use tractors instead of horse-drawn plows have greater yields. Which factor of production explains this result?

physical capital

Many economists blame the severity of the Great Depression on:

poor monetary policy conducted by the Federal Reserve.

Economists prefer using real GDP because, other things held constant, increases in _____ represent true increases in the standard of living.

production

Business cycles are short-term movements in:

real GDP around its long-term trend

Which of the following is the best measure of a country's standard of living?

real GDP per capita

Using a graph of the AD and long-run aggregate supply curves, the Internet revolution of the 1990s caused:

real growth to increase and inflation to decrease

If the price of gasoline increased 100% during a period of time when inflation was 100%, then the relative real price of gasoline would:

remain constant.

An increase in expected inflation will cause the economy's long-run aggregate supply curve to:

remain unchanged.

Suppose the federal government gives taxpayers a tax rebate financed by borrowing. If taxpayers use the tax rebate to pay off their debts, total spending will:

remain unchanged.

If the CPI was 100 in 2000 and 120 in 2010 and the price of a gallon of milk was $4.00 in 2000 and $4.80 in 2010, then in relative terms the real of price milk between 2000 and 2010:

remained the same.

One of the best explanations for why some countries are rich and others are poor is that:

rich countries organize their factors of production more efficiently than poor countries.

Disinflation occurs when the overall price level:

rises at a decreasing rate

A decrease in spending growth will cause the economy's aggregate demand curve to:

shift to the left.

Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a:

shock to aggregate demand.

If a country's GDP per capita rises, this means that:

some people in the country have more wealth.

Over the past few decades, the U.S. economy has switched from a primarily manufacturing economy to a service economy. Many individuals working in manufacturing positions lost their jobs, and many new jobs opened up in services. For those who lost jobs in manufacturing, this is an example of:

structural unemployment

A worker repairing VHS cassette-tape players was laid off because most of his customers have started using DVD players. This worker is now:

structurally unemployed

For a given aggregate demand curve, the specified rate of spending growth is the growth rate of money:

supply plus the growth in velocity.

Which are immediate causes of the wealth of nations?

technical knowledge and human capital

The key reason for China's growth miracle beginning in the late 1970s was:

the assignment of private property rights.

Orrin mines iron ore, which he sells to Thorin, who turns iron ore into steel. The steel is sold to Gorin, who turns the steel into battle axes. The battle axes are sold by a merchant in the city to adventurers. Which of the following would be considered a final good?

the battle axes sold to the adventurers

Fiscal policy is MOST effective if:

the economy is hit by a shock to aggregate demand.

Which of the following is NOT considered a government purchase?

unemployment checks

Intermediate goods are goods:

used to produce other goods.

History has shown that when collective property rights are converted to private property rights:

work effort, investment, and productivity all increase

Which of the following would cause the AD curve to shift to the left?

increased growth in imports

For a tax system in which higher income earners pay a larger share of their incomes in taxes, a higher inflation rate:

raises the tax burden of taxpayers.

Suppose the nominal GDP of a country is $500 billion. If the velocity of money in the country is 10, then the country's money supply will equal:

$50 billion.

According to the quantity theory, which of the following could cause the price level to decrease?

The population spends less money.

Frictional unemployment is caused by:

creative destruction

Tim buys a house from Betty in 2011 for $200,000. Betty receives $185,000 and $15,000 goes to Mary, the real-estate agent. Betty originally purchased the house in 2007 for $240,000. What value is added to GDP in 2011 for this transaction?

$15,000

(Figure: Aggregate Demand) Point A on this aggregate demand curve represents a real GDP growth rate of:

5%

(Table: Employment, Unemployment, and Labor Force Participation) Refer to the table. What is the unemployment rate of the country in 2010?

5%

(Table: Employment, Unemployment, and Labor Force Participation) Refer to the table. What is the labor force participation rate of this country in 2010?

76%

On a given aggregate demand curve, if the rate of spending growth is 10% and the growth rate of the money supply is 2%, then the velocity of money must be growing at:

8%

Roughly what percent of the world's population live in countries with per capita GDP lower than the average world per capita GDP?

80%

When the Communist Party took over China, "The Great Leap Forward" was instituted as a system to encourage the growth of agricultural production in China. Yet, during this time, millions of people starved to death. Why did this occur?

Farmers' self-interest was not aligned with social interest.

Increasing the amount of physical capital tends to _____ output per hour of workers and _____ the value of workers.

Increase; increase

Fiscal policy

Is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations.

Which of the following would the BLS define as a discouraged worker?

Mary, who was laid off last year and who was looking for a full-time job until last month

If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take in order to keep inflation and unemployment stable?

No government action can achieve those goals.

(Figure: Oil Market Diagrams) Consider the world oil market diagrams presented in the figure. Which of the panels correctly depicts what happened in the market for oil during the 1973 OPEC oil crisis?

Panel B

Oil shocks, the shift from manufacturing to service jobs, and the use of new technologies are reasons for _____ unemployment.

Structural

Which answer best explains why prices of some popular goods have fallen over time?

Technological advances have reduced production costs.

In what way are monetary and fiscal policies similar?

They both target aggregate demand to overcome business fluctuations.

Why are transfer payments not counted as part of GDP?

Transfer payments do not involve the purchase of a final good or service.

Which of the following is an example of money illusion assuming that inflation is 5%?

You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend.

During a recession, consumers hold more money by cutting back on their spending, resulting in _____ in inflation and _____ in real growth.

a decrease; a decrease

According to the text, the consensus about the effects of the 2009 fiscal stimulus was that:

a lot of the tax cuts did not turn into consumer spending.

Which of the following real shocks would likely have the largest impact on U.S. GDP?

a reduction in the overall supply of oil

if wages are not as flexible as prices in the AD -AS model, an increase in money growth will lead to:

an increase in inflation and in the profits of firms.

If the money supply, the velocity of money, and the price level are fixed, then increases in real GDP:

are impossible because real GDP must also be fixed.

(Table: Unemployment Statistics for Country X) Using the data in the table, Country X is likely to be in a recession in:

both 1995 and 2005.

(Table: Consumer Price Index) Refer to the CPI values in the table for the years 2005 to 2010. In which year(s) did the country experience disinflation?

both 2007 and 2009

Which could be sources of funding for a government that wants to increase government expenditures?

both taxes and borrowing

Which statement is TRUE?

by the time fiscal policy is in place, it is likely that macroeconomic conditions may have changed entirely

When the government sells bonds, some of the funds that would have gone to private investments go to the government. This situation is called:

crowding out.

When countries have severe debt problems:

expansionary fiscal policy can reduce real growth.

An increase in _____ will shift the SRAS curve.

expected inflation, but not actual inflation

Creative destruction occurs at the level of the:

firm, industry, and entire economy

Structural unemployment is more persistent in France than in the United States because:

french workers have less incentive to quickly seek a new position since their unemployment benefits are much higher.

Someone who recently moved to Florida because of its warmer climate will need to spend some time looking for a new job. This is an example of:

frictional unemployment.

Honest government _____ economic growth.

fuels

Inflation tends to cause nominal wages to:

increase

Hyperinflation refers to the case in which inflation:

is extremely high.

Ricardian equivalence:

is less significant when consumers deem tax cuts or rebates as permanent.

Inflation hurts the economy because:

it affects the ability of market prices to send signals about the value of resources

during a typical nonrecession year, the duration for at least half of the unemployed is:

less than 14 weeks.

If people expect an inflation rate of 3% and later it turns out to be 5%, then the real rate of return will be:

less than the equilibrium rate

GDP is calculated by:

multiplying the quantity of all goods and services by their prices and adding together the results

Two of the challenging factors faced by the BLS when computing the consumer price index are:

new goods and better-quality goods.

The short-run aggregate supply curve shows the _____ relationship between the inflation rate and real growth during the period when prices and wages are _____.

positive; sticky

Property rights encourage:

saving and investment in both physical and human capital

When C falls, the aggregate demand curve:

shifts to the left.