Macroeconomics Midterm Review

At an annual growth rate of 7 percent, real GDP will double in about:

10 years

The size of the negative GDP gap as a percent of potential GDP for the above economy is

12 percent.

The market system's answer to the fundamental question "Who will get the goods and services?" is essentially:

"Those willing and able to pay for them."

The market system's answer to the fundamental question "How will the system promote progress?" is essentially:

"Through the profit potential that encourages development of new technology."

The amount of output being forgone by this economy is:

$24 billion.

Refer to the data. DI is:

$274

In the table above, per capita GDP was about:

$303 in year 3 in Zorn

If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is:

$385 billion.

Real GDP for year 5 is:

$40

Refer to the data. NI is:

$402

Refer to the data. GDP is:

$417

Alejandro Scoobertini owns a store specializing in soccer jerseys. In 2016, he purchased $150,000 worth of jerseys from manufacturers, employed one worker for $40,000, purchased $20,000 worth of supplies from as office supply store, and sold jerseys for $280,000. Based on this information, what was the value added at Alejandro's store in 2016?

$70,000

Suppose the nominal annual interest rate on a two-year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is:

3 percent.

If the marginal cost of producing this good at the optimal quantity is $4, the optimal quantity must be

3 units

In the table above, between years 1 and 2, real GDP per capita grew by approximately

4

Refer to the figures above. Which figure(s) represent(s) a situation where firms are likely to hold inventories to accommodate unexpected changes in demand?

B only.

Refer to the figures above. Which figure(s) represent(s) a situation where negative demand shocks can result in a recession?

B only.

The agency responsible for compiling the National Income Product Accounts for the U.S. economy is the:

Bureau of Economic Analysis

The area that identifies the maximum sum of consumer surplus and producer surplus is

a+b+c+d

In the treatment of U.S. exports and imports, national income accountants:

add exports, but subtract imports, in calculating GDP.

In an economy experiencing a persistently falling price level:

changes in nominal GDP may either overstate or understate changes in real GDP.

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:

deflation of 3.33 percent.

Strong property rights are important for modern economic growth because:

people are more likely to invest if they don't fear that others can take their returns on investment without compensation.

Which of the following is an example of market failure?

positive externalities, public goods, negative externalities (all of the above)

According to the Coase theorem:

private individuals can often negotiate their own resolution of externality problems, without the need for government intervention.

Market failure is said to occur whenever

private markets do not allocate resources in the most economically desirable way.

Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person's real income will:

rise by about 15 percent.

Based on the information in the table above, the economy has experienced a:

rising real GDP.

If an economy wants to increase its current level of investment, it must:

sacrifice current consumption

The two topics of primary concern in macroeconomics are:

short-run fluctuations in output and employment and long-run economic growth

Susie has lost her job in a Vermont textile plant because of import competition. She intends to take a short course in electronics and move to Oregon, where she anticipates that a new job will be available. We can say that Susie is faced with:

structural unemployment.

Suppose that inventories were $80 billion in 2015 and $70 billion in 2016. In 2016, national income accountants would:

subtract $10 billion from other elements of investment in calculating total investment

Supply-side market failures occur when

supply curves don't reflect consumers' full willingness to pay for a god or service

In the table above, between years 1 and 2, real GDP grew by ______ percent in Alta.

5

Refer to the information above about a hypothetical economy. If the members of the underground economy are presently counted as part of the unemployed when in fact they are employed, the official unemployment rate is overstated by about:

5 percentage points.

If the rate of inflation is 12 percent per year, the price level will double in about:

5.8 years.

The unemployment rate in Scoob is:

6.9 percent.

If year 3 is chosen as the base year, the price index for year 1 is:

60

Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is:

8 percent.

Other things equal, which of the following would decrease the rate of economic growth, as measured by changes in real GDP?

A decrease in the labor force participation rate.

Which of the following is an example of a supply shock?

A dramatic increase in energy prices increases production costs for firms in the economy.

Which of the following best illustrates the circular flow model in action?

All of these answers illustrate the workings of the circular flow model.

Which of the following would not be expected to increase labor productivity?

An increase in the size of the labor force.

Refer to the diagram above. Assuming equilibrium price P1, consumer surplus is represented by areas

a+b

Which of the following statements is most accurate about the prospects for poorer ("follower") countries catching up with richer ("leader") countries?

Catching up is possible as "follower countries" tend to grow faster than "leader countries."

Which of the following is a distinguishing feature of a command system?

Central planning

Which of the following is an example of a demand shock?

Consumers become worried about job loss and buy fewer goods and services than expected

Which of the following statements is most accurate about economists' concerns about deflation?

Deflation can lead to bankruptcies that trigger a downward deflationary spiral.

Which of the following statements is most accurate about advanced economics

Economies experience a positive growth trend over the long run but experience significant variability in the short run

Which of the following would be the best example of regulatory capture?

Executives from the Ford, General Motors, and Chrysler companies write the rules regulating automobile safety and fuel requirements

Refer to the figures above. In terms of representing the economy:

Figure B represents the very short run, where prices are sticky, and Figure A represents the longer run

What is the difference between financial investment and economic investment?

Financial investment refers to the purchase of assets for financial gain; economists investment refers to the purchase of newly created capital goods

Which of the following best explains why prices tend to be inflexible even when demand changes?

Firms may be reluctant to change prices for fear of setting off a price war or losing customers to rivals

Which of the following statements best describes how firms respond to demand shocks under conditions of inflexible prices?

Firms respond to shorter-term demand shocks by adjusting inventories; more persistent changes in demand result in changes in production levels

Which of the following impacts would economists expect to result from chronic budget deficits?

Government control of an inefficiently large share of the economy's resources

Which of the following will tend to socialize losses and privatize gains?

Government guarantees to private investors that they will get their money back even if the company fails

Which of the following is not a typical characteristic of a market system?

Government ownership of most property resources

Why are economists concerned about inflation?

Inflation lowers the standard of living for people whose income does not increase as fast as the price level.

In what way, if any, does the invisible hand affect government resource allocation?

It does not help resource allocation, as there are no competitive forces within government that automatically direct resources to their best uses

Which of the following statements is true about risk management in market systems versus command systems?

Market systems manage risk better because entrepreneurs taking risks bear the costs of poor decisions, where in command systems government decision makers don't bear those costs.

Which of the following is a distinguishing feature of laissez-faire capitalism?

Minimal government intervention

The U.S. Federal Reserve, the Bank of Japan, the Bank of England, and the European Central Bank are all in charge of what for the countries they represent?

Monetary policy.

What is the difference between national income and personal income?

National income represents income earned by American-owned resources, while personal income measures received income, whether earned or unearned.

Which of the following is most closely related to recessions?

Negative real growth in output

Since World War II:

South Korea's market economy has significantly outperformed North Korea's command economy.

The government of Southland wants to improve resource allocation in the country. Which of the following actions by the Southland government is most likely to accomplish this?

Taxing polluters and subsidizing firms that are creating significant positive externalities.

Which of the following activities is excluded from GDP, causing GDP to understate a nation's well-being?

The child-care services provided by stay-at-home parents.

Which of the following best describes the invisible-hand concept?

The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.

Which of the following is an example of a public good?

a weather warning system

Which of the following statements is true about causes of business cycle fluctuations?

There are a wide range of theories as to the underlying causes of business cycle movements.

Why are high rates of unemployment of concern to economists?

There is a lost output that could have been produced if the unemployed had been working

Which of the following institutional arrangements is most likely to promote growth?

Unrestricted trade between nations.

Which of the following is one of the Five Fundamental Questions?

What goods and services will be produced?

From an economist's perspective, when is government too big?

When the marginal costs from additional government spending exceed marginal benefits.

Jennifer buys a piece of costume jewelry for $33, for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $30. Jennifer experiences

a consumer surplus of $9, and Nathan experiences a producer surplus of $3

Cyclical unemployment results from:

a deficiency of spending on goods and services.

Two major virtues of the market system are that it:

allocates resources efficiently and allows economic freedom.

The aggregate cost of unemployment can be measured by the:

amount by which potential GDP exceeds actual GDP.

Refer to the diagram above. If actual production and consumption occur at Q1,

an efficiency loss (or deadweight loss) of b+d occurs

Refer to the above diagram, in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assumer that the number of people affected by these external costs is large. Without government interference, this market will reach

an overallocation of resources to this product

Inflation is undesirable because it:

arbitrarily redistributes real income and wealth.

Economic profits and losses:

are essential to the reallocation of resources from less desired to more desired goods.

Professional buyers of antiques often have more information about the value of antique objects than do the sellers. This illustrates

asymmetric information

"Earmarks" refer to:

authorized expenditures benefiting a narrow, specifically designated group that are included in more comprehensive spending legislation.

The socially optimal amount of pollution abatement occurs when society's marginal

benefit of abatement equals its marginal cost of abatement

Recurring upswings and downswings in an economy's real GDP over time are called:

business cycles.

Assuming equilibrium price P1, producer surplus is represented by areas

c+d

The industries or sectors of the economy in which business cycle fluctuations tend to affect output most are

capital goods and durable consumer goods.

In national income accounting, the consumption category of expenditures includes purchases of:

consumer durable goods, consumer nondurable goods, and services.

In 2000s, McDonald's introduced its McSalad Shaker, which failed to catch on with the public and was subsequently dropped from the menu. This failure illustrates the idea of:

consumer sovereignty

GDP can be calculated by summing:

consumption, investment, government purchases, and net exports

"Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right time. This is a nearly impossible task without markets and profits." This quotation best identifies the:

coordinating problem under central planning

Real GDP measures:

current output at base year prices

If the natural rate of unemployment in Scoob is 5 percent, then:

cyclical unemployment is about 2 percent.

Suppose that Steve and Susie each perceive $200 of marginal benefit from a proposed new park, whereas Elizabeth perceives $800. If the proposed tax levied on each for the park would be $300, a majority vote will

defeat this project and resources will be under allocated to it

Economic growth is best defined as an increase in:

either real GDP or real GDP per capita.

The labor force includes:

employed workers and persons who are officially unemployed.

The competitive market system:

encourages innovation because successful innovators are rewarded with economic profits.

The idea of government failure includes all of the following except:

extensive positive externalities from public and quasi-public goods

Advocates for a structural solution to the Great Recession argued that:

firms should be allowed to go bankrupt, allowing the economy to correct for resource misallocations.

Final goods and services refer to:

goods and services purchased by ultimate users, rather than for resale or further processing

"Consumer sovereignty" refers to the:

idea that the decisions of producers must ultimately conform to consumer demands.

As it relates to the political process, the principal-agent problem results from the:

inconsistency between voters' interest in programs and politicians' interest in reelection.

In the diagram above, the most likely cause of a shift from AB to CD would be a(n):

increase in productivity

Suppose nominal GDP was $360 billion in 1990 and $450 billion in 2000. The appropriate price index (1985 = 100) was 120 in 1990 and 125 in 2000. Between 1990 and 2000 real GDP:

increased by $60 billion.

Over the past several decades, the percentage of women in the paid U.S. workforce has:

increased due to higher wages, expanded job accessibility, changing preferences and attitudes, and other factors.

Economists who believe that the 1995-2012 rise in the average rate of productivity growth may be long lasting claim that the above-normal economic growth in the United States between 1995 and 2012 was caused by:

increased entrepreneurial activity, application of information technology, and global competition.

Based on this information, we can conclude that Harry's production of large pepperoni pizzas this year:

increased nominal GDP by $20,000 but left real GDP unchanged

Network effects are:

increases in the value of a product to each user, including existing users, as the total number of users rises

Broadly defined, competition involves:

independently acting buyers and sellers and freedom to enter or leave markets.

Government officials tend to make:

inefficient choices because they lack the information necessary to accurately weigh marginal benefits and marginal costs.

An economic system

is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem

Consumer surplus

is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price

The use of money contributes to economic efficiency because:

it promotes specialization by overcoming the problems with barter.

The annual rate of inflation can be found by subtracting:

last year's price index from this year's price index and dividing the difference by last year's price index.

A lender need not be penalized by inflation if the:

lender correctly anticipates inflation and increases the nominal interest rate accordingly.

GDP is the:

monetary value of all final goods and services produced within the borders of a nation in a particular year.

Countries that have experienced modern economic growth have also tended to:

move toward more democratic forms of government

For the years shown, the growth of:

nominal GDP overstates increases in real output.

The two main characteristics of a public good are

nonrivalry and nonexcludability

Demand-pull inflation:

occurs when total spending exceeds the economy's ability to provide output at the existing price level.

Proponents of economic growth say that pollution:

occurs, not because of growth, but because common resources are treated as free goods.

Banks and other financial institutions:

promote economic growth by helping to direct household saving to businesses that want to invest.

A nation's infrastructure refers to:

public capital goods such as highways and sanitation systems.

In national income accounting, government purchases include:

purchases by federal, state, and local governments

The growth of GDP may understate changes in the economy's economic well-being over time if the:

quality of products and services improves.

Modern economic growth refers to countries that have experienced an increase in:

real output per person

From society's point of view the economic function of profits and losses is to:

reallocate resources from less desired to more desired uses.

In a market economy, the government's power to coerce can:

reduce private-sector risk and increase economic efficiency

In a sporting goods store, you can buy the equipment you want and forgo the rest. But in an election you "buy" the entire range of the candidate's positions, including some you may not agree with. This difference:

reflects limited and bundled choices in the public sector

If a nation's real GDP increases from 100 billion to 106 billion and its population jumps from 200 million to 212 million, its real GDP per capita will:

remain constant.

Suppose American winemakers persuade the federal government to issue a directive to serve only domestically produced wine at government functions. This would be an example of:

rent-seeking behavior

People enjoy outdoor holiday lighting displays and would be willing to pay to see these displays but can't be made to pay. Because those who put up lights are unable to charge others to view them, they don't put up as many lights as people would like. This is an example of a

supply-side market failure

Refer to the above diagram, in which S is the market supply curve and S1 is a supply curve comprising all costs of production, including external costs. Assumer that the number of people affected by these external costs is large. If the government wishes to establish an optimal allocation of resources in this market, it should

tax producers so that the market supply curve shifts leftward

Real GDP per capita in the United States (as of 2010) exceeds that of France primarily because:

the United States has a higher percentage of the working-age population in the labor force and because U.S. employees average about 14 percent more hours worked per year.

A positive externality or spillover benefit occurs when

the benefits associated with a product exceed those accruing to people who consume it.

Allocative efficiency occurs only at that output where

the combined amounts of consumer surplus and producer surplus are maximized

If depreciation exceeds gross investment:

the economy's stock of capital is shrinking

As it relates to corporations, the principal-agent problem is that

the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals).

Based on the information in the table above,

the growth of nominal GDP understates the growth of real GDP.

Producer surplus is the difference between

the minimum prices producers are willing to accept for a product and the higher equilibrium price

In response to the financial crisis that began in2007, the government began to bail out banks deemed "too big to fail." Critics of this action argued that this would create the prospect of future bailouts and encourage banks to be fiscally irresponsible in the future. This illustrates

the moral hazard problem

Suppose total output (real GDP) is $4,000 and labor productivity is $8. We can conclude that:

the number of worker-hours must be 500.

In the second quarter (three-month period) of 2001, U.S. nominal GDP increased but U.S. real GDP declined. We can conclude that:

the price level rose by more than nominal GDP.

In 1933, net private domestic investment was a minus $6.0 billion. This means that:

the production of 1933's GDP used up more capital goods than were produced in that year.

Suppose that Mick and Cher are the only two members of society and are willing to pay $10 and $8 respectively, for the third unit of a public good. Also, assume that the marginal cost of the third unit is $17. We can conclude that

the third unit should be produced

A negative externality or spillover cost occurs when

the total cost of producing a good exceeds the costs borne by the producer

Competition means that:

there are independently acting buyers and sellers in each market

Which of the following is not an argument made by proponents of economic growth?

there is a direct relationship between a growing real GDP and rising pollution.

As it applies to insurance, the moral hazard problem is the tendency for

those who buy insurance to take less precaution in avoiding the insured risk

In a competitive market economy, firms select the least-cost production technique because:

to do so will maximize the firms' profits

If personal income exceeds national income in a particular year, we can conclude that:

transfer payments exceeded the sum of Social Security contributions, corporate income taxes, and undistributed corporate profits.

Official unemployment statistics:

understate unemployment because discouraged workers are not counted as unemployed.

A large underground economy results in an:

understated GDP

Government passes a law requiring all domestic clothing factories to pay workers at least $20 per hour. As a result, domestic clothing companies move their operations overseas, leaving domestic workers unemployed. This situation illustrates the problem of:

unintended consequences

The annual growth of U.S. labor productivity:

was greater between 1995 and 2012 than between 1973 and 1995.

The incentive problem under communist central planning refers to the idea that:

workers, managers, and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products.