Macro 5-8

Each year when they announce the awards for best new​ restaurants, the recipients are almost always in the large cities. These restaurants are praised for their creativity and bold new dishes. What are some of the factors that would explain why the innovative restaurants are found in big​ cities?

- Larger cities allow for the specialization of​ labor, which can lead to greater creativity among chefs. - In larger​ markets, restaurants have more incentives to come up with innovative and creative new dishes. - There are more chances to have​ face-to-face interactions, which can lead to increased innovation and creativity.

Suppose a country makes substantial investments to improve its roads. Give an​ example(s) of how this would improve productivity in the economy as a whole. ​

- Total transportation costs would be reduced. - Substantial investments to improve the roads would encourage private investment.

An item in the federal budget that is not included as government purchases in GDP is ___________________. . An item included in government purchases but not part of the federal budget is ___________________.

1. Interest on government debt 2. state government purchases

Suppose the starting salary for a new assistant economics professor was ​$19 comma 000 in 1976 and ​$80 comma 000 in 2014. The value of the CPI for 2014 was​ 236.7, compared to 56.9 in 1976. A​ newly-hired professor earned more in real terms in _________, with a real salary of ​__________.

2014, $33,798

Most states do not replace the entire wages of individuals on unemployment​ insurance; instead, they replace about _____

40%

In Central and South​ America, the size of the underground economy is

41% of GDP

In January​ 2018, more than 34 percent of the unemployed had been unemployed less than _______.

5 weeks

Using the data in the table shown at​ right, the two most severe recessions since World War II in terms of the fall from peak to trough are...

6 & 11

Which of the following are not included in​ GDP?

A mother taking care of children at home.

Economic historians have found that the average height of individuals in both the United States and the United Kingdom fell during the​ mid-nineteenth century before rising again. A. This was a period of rapid industrialization as well as migration into urban areas. What factors do you think might account for this fall in​ height? B. How would you evaluate economic welfare during this​ period?

A. All of the above B. Economic welfare decreased as measured by average height.

Some economists say that economic growth involves a​ trade-off between current generations and future generations. A. If a current generation raises its saving​ rate, what does it​ sacrifice? B. What will be gained for future​ generations?

A. Current consumption B. both A & B

Some economists are concerned about the​ "brain drain," the phenomenon in which highly educated workers leave developing countries to work in developed countries. Other economists have argued that​ "brain drain" could create incentives for others in the country to secure increased education and many of the newly educated might not emigrate. A. Explain why the​ "brain drain" could lead to increased education among the remaining residents. B. How would you test this​ theory?

A. When highly educated workers leave, more high paying jobs become available. B. All of the above.

Suppose the U.S. government hires workers who are currently unemployed but does not give them any work to do. What will happen to the measured U.S. unemployment​ rate? A. The unemployment rate will _______. B. Under these​ circumstances, do changes in the measured U.S. unemployment rate accurately reflect changes in the underlying economic situation and​ production?

A. decrease B. No, GDP will increase through the underlying economic situation will not have improved

The graph at right shows total output as a function of the stock of capital and two lines of depreciation as a function of the stock of capital. The initial depreciation line is dK​, and the new depreciation line is ​dK'. A. In this​ case, the society switches to equipment that depreciates __________. B. In this​ case, the stock of capital will _________ and output Y will ____________.

A. slowly B. increase, increase

In an economy with no government sector or foreign​ sector, saving must equal investment because

All of the above

What other information might you want to know about these and other recessionary periods to judge their​ severity?

All of the above

Which of the following may influence technological​ progress?

All of the above

Air quality in Los Angeles deteriorated in the 1950s through the 1970s and then improved in the 1980s and 1990s. Can a change in air quality such as this be incorporated into our measures of national​ income?

All of the above are reasonable arguments.

With secure land​ titles, parents can work outside the home​ (rather than guarding their​ property) and earn higher incomes. Explain why this might reduce child labor.

All of the above.

How do you think the Internet and online shopping would affect the menu costs of​ inflation?

Any of the above are reasonable arguments.

In​ Japan, it is a custom for the​ bride's family to give a gift having very large monetary value to the family of the groom. How might this affect the savings rate in this​ country?

Both A and B

Some critics of cultural theories of economic growth note that some societies can suddenly start to grow very rapidly with no obvious accompanying cultural changes. How well does Professor Gregory​ Clark's theory fit the rapid growth in some East Asian economies in recent​ years?

Clark's theory fits well with the rapid growth in East Asian economies since western values have become more acceptable.

Economic models that assume that wages and prices adjust freely to changes in demand and supply are known as ____________ models.

Classical

What is the largest component of national​ income?

Compensation of employees​ (wages and​ benefits).

The three key types of unemployment are

Cyclical, Frictional and structural

Although people with high incomes appear to be happier than those with low​ incomes, people in the United States in general have become less happy over the last 30 years even though real GDP has risen. Why might increases in real GDP not necessarily have increased​ happiness?

Everyday life has become more stressful.

Suppose we view the financial crisis of 2007 as a negative technological shock. According to the real business cycle​ model, wages will _________ and potential output will__________.

Fall, Fall

Economist William Easterly is a strong proponent of foreign aid.

False

New growth theory suggests that consumption spending will lead to permanent increases in the rate of technological progress.

False

The average annual inflation rate in the United States was higher from 1990 to 2017 than it was from 1970 to 1980.

False

​Shoe-leather costs typically decrease with the rate of inflation..

False

Robert is 62 and lost his job in an engineering firm. Pamela is 53 and lost her job. The labor force participation rates ...

For men will decline if Robert retires but will increase for women if Pamela seeks another job

Some economists have suggested that the time it takes the economy to recover to the level where it originally was when the recession started is a good measure of the speed of a recovery. This measure tells you how long it takes to ...

Get back to the peak before the recession started

Suppose local governments in suburban communities around the country started building large community swimming pools. Identify what type of spending this might crowd​ out, and compare this to the effect of government spending on exploration of Mars.

Government spending on large community swimming pools crowds out business​ investment, whereas government spending on exploration of Mars does not crowd out any spending.

The circular flow describes the process by which GDP generates _____________ ​, which is spent on goods and services.

Income

In the circular flow​ diagram, why do the arrows corresponding to the flow of dollars and the arrows corresponding to the flow of goods go in the opposite​ direction?

Income is exchanged for good and goods are exchanged for income

Which of the following will promote economic growth through capital​ deepening?

Increased imports to purchase supercomputers for industry.

Suppose that a group of consumer activists claims that drug companies earn excessive profits because of the patents they have on drugs. The activists advocate cutting the length of time that a drug company can hold a patent to five years. They argue that this will lead to lower prices for drugs because competitors will enter the market after the​ five-year period. Do you see any drawbacks to this​ proposal?

It will reduce the incentive for drug companies to invent new drugs.

Which of the following countries experienced a deflation in the​ 1990s?

Japan

In Economy​ A, the government puts workers on the payroll who cannot find jobs for long​ periods, but these​ "employees" do no work. In Economy​ B, the government does not hire any​ long-term unemployed workers but gives them cash grants. Comparing the GDP statistics between the two otherwise identical​ economies, what can you determine about measured GDP and the actual level of output in each​ economy?

Measured GDP is higher in economy A, though the actual level of output in each economy is the same.

In the United​ States, it is relatively easy to obtain a mortgage to buy a house or borrow money to buy a car. Credit card offers appear routinely in the mail. These factors most likely have a ___________ effect on the rate of household savings.

Negative

In an open​ economy, increases in government spending can crowd out​ consumption, investment, or

Net exports

What do we add to GDP to reach​ GNP?

Net income earned abroad by U.S. holders

An economy increased employment first from 10,000 to 20,000 and then from 20,000 to 30,000. The corresponding increases in output were 15,000 and 20,000 respectively. Nothing else changed during this period. Did this economy exhibit law of diminishing marginal​ returns?

No​, because changes in output rose.

Suppose​ Ireland, prior to the potato​ famine, was at point a with Upper L 1 units of labor and Upper K 1 units of capital producing Upper Y 1 units of output.

Output decreased as Ireland slid to the left along its production function.

Which of the following is not included in the labor​ force?

People who do not have jobs, and do not want one

In​ China, housing is very expensive in large cities and purchasers must pay the full amount from their own resources as mortgages are not that common. These factors most likely have a __________ effect on the rate of household savings.

Positive

If individuals who had previously left the labor force returned and began searching for a job​, the measured unemployment rate will _________.

Rise

Robert is 62 and lost his job in an engineering firm. Pamela is 53 and lost her job. What options do you think Robert has that Pamela does​ not?

Robert can retire and collect Social Security but Pamela does not

____________ and ____________ are the two factors that determine how the stock of capital changes over time.

Saving, depreciation

When online movies began to replace stores renting​ DVDs, what type or types of unemployment was​ created?

Structural and frictional

Every​ year, the Philippines sends many workers abroad including​ nurses, health​ professionals, and oil workers. How do you think GNP and GDP in the Philippines​ compare?

This increases the​ Philippines' GNP by the net income earned abroad but does not change its GDP.

In​ Europe, the average resident takes several weeks more of vacation time than in the United States.​ Per-capita income,​ however, is higher in the United States than the European average. What can you say about relative economic welfare in Europe versus the United​ States?

To compare the two regions in terms of true economic​ welfare, you would have to put some value on the additional leisure time.

What part of government spending is excluded from​ GDP?

Transfer Payments

A higher saving rate will lead to a higher stock of capital in the long run.

True

China has a higher rate of technological progress than India.

True

Debtors gain from unanticipated inflation.

True

Individuals who are working part time for economic reasons and would like to work full time are not counted as unemployed in the traditional unemployment statistics.

True

The classical school of thought came to its fruition during the 1930's

True

The typical European works less hours per year than the typical U.S. worker.

True

When the economy is at full​ employment, there is no cyclical unemployment.

True

​Men's reported happiness has increased relative to​ women's reported happiness in the last several decades

True

Why do economists say that labor bears the full burden of the tax in this​ case?

Wages decrease by an amount equal to the tax.

If the​ labor-supply curve were​ horizontal, what would be the effects on​ wages, output, and​ employment?

Wages would be unchanged, but output and employment would decrease

If the​ labor-supply curve is​ vertical, what are the effects on real​ wages, output, and​ employment?

Wages​ decrease, but output and employment are unchanged.

If we cannot measure every invention or new​ idea, how can we possibly measure the contribution to growth of technological​ progress?

We can measure the effects of technological progress indirectly using growth accounting methods.

Why might you expect individuals who were unemployed in their 20s to have lower wages at the age of 40 than individuals with identical educational backgrounds but who were not​ unemployed?

While​ unemployed, workers lose some of their skills.

Suppose a community spends​ $1 million on salaries and equipment for its police department. Because it believes that citizens are now more law​ abiding, the community decides to cut back on the number of police it employs. As a​ result, the community now spends​ $800,000 less on the police officers. The crime rate remains the same. a. What happens to measured​ GDP? b. Does this change in GDP accurately reflect welfare in this​ case?

a. GDP falls by $800,000 b. No, because the crime rate has not changed

A trade deficit occurs when our exports ____________________ our imports.

are less than

Rising oil​ prices, which benefit some industries more than​ others,

can increase or decrease frictional unemployment

A policy of not enforcing patents or copyrights would _________ the incentive to be innovative.

decrease

Paul has young children at home and his wife is an executive at a major corporation. He has decided to work part time as a freelance blogger for an entertainment Web site. nothing Paul is considered to be...

employed

The production function illustrates the relationship between

factors of production and output

The natural rate of unemployment consists solely of

frictional and structural unemployment.

In many African​ countries, the government and international corporations pay high wages for jobs in the major​ cities, and many people migrate to the cities from farms where earnings are low. Unemployment rates in the​ city, therefore, are large. This can be explained in terms of

frictional unemployment because people are migrating and changing jobs.

Another term for potential output is ...

full-employment output

Some economists have argued that while immigration does not have a major effect on the overall level of wages for the entire​ economy, it does decrease wages near the Mexican border. Mexican immigration will

have a stronger impact on supply near the​ border, but may not affect the overall supply of labor for the entire U.S. economy.

When considering expenditures​ categories, the elderly might have more expenditures in

housing and medical care and less in​ transportation, education, and food.

A simple real business cycle explains all economic fluctuations with just technology shocks. During the Great​ Depression, real wages​ increased, which is

inconsistent with a simple real business cycle because if there is a negative technology​ shock, output and real wages would both fall.

Consider this​ statement: Since capital is subject to diminishing​ returns, an increase in the supply of capital will reduce real wages. This statement is wrong because an increase in the supply of capital will...

increase the marginal benefit from employing labor and therefore increase the demand for labor and real wages.

Suppose a government places a 10 percent tax on incomes and spends 40 percent of the money from taxes on investment and the rest on public consumption​ goods, such as military parades. Individuals save 30 percent of their income and consume the rest. In this​ case, total investment​ (public and​ private) ...

increases

Buying a foreign car made abroad for​ $50,000

increases consumption by​ $50,000, increases imports by​ $50,000, leaves exports​ unchanged, decreases net exports by​ $50,000, but does not change GDP.

Suppose you buy a new car for ​$20,000. One year later it is worth ​$15,000​, and two years later it is worth ​$13,200. The depreciation on the car ...

is 34 percent for the two years overall.

Computers have revolutionized banking for consumers through the growth of ATMs and electronic bill paying capabilities. All of these improvements for consumers might not be counted as technological progress because technological progress

is defined by economists as an increase in output with no additional increases in inputs.

Compared to other​ countries, the United States has a relatively _______ share of consumption spending in GDP.

large

Australia contains many natural resources and foreign firms often come into Australia to extract them. The profits that those foreign firms make are sent back to their home countries. GDP in Australia is...

larger than GNP in Austrailia because the profits that are earned by foreign firms are sent back to their home country

You might think it would be worse if other people are unemployed at the same time as you were because it would be harder to find a job. But the psychological evidence shows the opposite. Unemployment may seem less painful to individuals if their peers are also unemployed because

misery loves company.

Basing your answer on the research reported in the​ text, India is

more vulnerable now to increases in temperatures than it will be in twenty years because more development will allow the economy adapt to higher temperatures.

The elderly might consume a different basket of goods than the average for the U.S. population because their

needs and wants are different because they are at a different stage in life.

Capital deepening comes to an end because of the

principle of diminishing returns.

We can measure the output of an economy by looking at either production or income because

production generates income

Roughly 10 percent of the populations of the Phillipines works overseas. Suppose overseas Philippine workers returned to their home country. Relying on the linked figure​, this reverse flow of people on wages and employment will

raise wages in the U.S. and lower wages in the Phillipines

The GDP deflator is calculated for any given year by dividing nominal GDP by ___________ GDP and multiplying by 100.

real

To gauge living standards across countries with populations of different​ sizes, economists use

real GDP per capita

The single largest component of the basket of goods that comprises the CPI is the category for

rent.

An increase in labor force participation will shift the​ labor-supply curve to the _________, leading to lower real wages and higher employment.

right

in the amount of capital in the economy will shift the demand for labor curve to the _________, leading to higher real wages and employment.

right

Using the Penn World Tables​ (http://www.rug.nl/research/ggdc/data/pwt/) for real gross domestic product per​ capita, compare the relative growth performance for real GDP per capita of France and Japan from 1950 to 2000. The data ___________ the theory of convergence.

support

Once we account for changes in the labor​ force, ______________________ is the next biggest source of the growth of GDP in the United States.

technological progress

Convergence is the process by which poorer countries close the gap with richer countries in terms of real GDP per capita. Suppose the line in the figure at right pointed up and to the right. That would tell us....

that there is less of a tendency for convergence.

The line for nominal GDP lies below the line for real GDP in the years prior to 2012 because... (graph)

the GDP deflator is less than 100

​Per-capita output is higher in the United States than in Germany and yet output per worker is higher in Germany. According to recent​ studies, the main cause for this is the difference in

the amount of labor their workers supply to the market.

Facebook does not sell products but does generate value added. You could measure its value added as the sum of

the payments it makes to its factors, including its profits

Top athletes or entertainers would be more likely to change countries to reduce their taxes as compared to ordinary​ middle-class workers because

these individuals can realize more tax savings than ordinary​ middle-class workers who have lower incomes.

Soft drink companies spend a considerable amount of money on marketing. These expenditures could be considered a form of capital because

this intangible capital is an important source of economic growth.

An increase in the stock of capital shifts the production function

upward

Many economists believe countries that open themselves to foreign investment of plant and equipment will benefit in terms of increased technological change because local companies will learn from the foreign companies. In the last several​ decades, China has been more open to foreign investment than India. This is consistent with the two​ countries' patterns of economic growth because

​China's growth in GDP was much higher than​ India's growth in GDP.

Suppose a health worker visited one village and personally gave residents sweets in order to take vaccinations. In this​ village, vaccination rates increased. Is this strong evidence that giving sweets would increase vaccination​ rates?

​No, because the worker only visited one village and it was not a controlled experiment.

The four factors included in the expanded circular flow but not in the simple circular flow are

​government, exports,​ imports, and taxes.