Macroeconomics Test: Part 2 Study Guide

Consider two scenarios for a nation's economic growth. Scenario A has real GDP growing at an average annual rate of 3.5 percent; scenario B has an average annual

20 years under scenario A, versus 16 years under scenario B.

1. Improvements in technology. 2. Increases in the supply (stock) of capital goods. 3. Purchases of expanding output. 4. Obtaining the optimal combination of goods, each at least-cost production. 5. Increases in the quantity and quality of natural resources. 6. Increases in the quantity and quality of human resources. Use the accompanying list to answer the following question. As distinct from the supply factors and demand factor of economic growth, the efficiency factor(s) of economic growth is (are)

3 only

A nation's real GDP was $250 billion in 2015 and $265 billion in 2016. Its population was 122 million in 2015 and 125 million in 2016. What is the growth rate of real GDP per capita in 2016?

3.4 Percent

In the periods 1953-73 and 1973-95, U.S. real GDP grew at the average annual rates of about

3.6 percent and 2.8 percent, respectively.

One year nominal GDP was $286 billion and the price index was 88. Real GDP that year was

325 Billion

What percentage of the U.S. adult population has a college or post-college education (as of 2015)?

33 %

Suppose that inventories are rising. We can expect that, in the future,

real GDP will likely decrease.

Which of the following formulas is correct? Percentage change in

real income approximates percentage change in nominal income minus percentage change in price level.

Economists were sharply divided over how to best fight the Great Recession. A vocal minority of economists favored the "Structural Solution," arguing that the economy needs to undergo some structural adjustments and that government should, therefore,

rely on the invisible hand of the market to reallocate resources, by letting weak firms die out quickly.

For a person to keep his real income steady at a certain level from one year to the next, his nominal income must

rise as fast as the price index.

When the government prints money faster than output is expanding, the inflation that will occur is a form of

taxation

If prices are "sticky" in the short run, then

the economy will respond to demand shocks primarily through changes in output and employment.

Inflation is a rise in

the general level of prices over time

Real GDP is

the nominal value of all goods and services produced in the domestic economy, corrected for inflation or deflation

Which of the following is a primary use for national income accounts?

to measure changes in the value of production and income in the economy

General sources of shocks that can cause business cycles include the following, except

unemployment jumps and production drops

One labor market quirk that helps explain why unemployment goes up so much in a recession is that

wages are flexible upward but "sticky" downward

Before the Industrial Revolution, living standards in the world

were relatively stagnant for long periods of time.

The "rule of 70" is a formula for determining the approximate number of

years that it would take for a value (like real GDP) to double

Which of the following statements is correct?

Between 1953 and 2015, increases in labor productivity account for more of the growth in U.S. real GDP than do increases in the quantity of labor.

Who are the main economic investors in a market economy?

Businesses

T or F: Buying 100 shares of Google stock would be an example of economic investment.

FALSE

T or F: Disposable income measures the before-tax income received by resource suppliers

FALSE

T or F: If an economy has 800,000 work-hours employed, and its labor productivity is $16/hour, then its real GDP must be $50,000.

FALSE

T or F: In the growth debate, critics of economic growth define "making a better living" as identical to "the good life."

FALSE

T or F: Real GDP per capita is found by dividing real GDP by the size of the labor force. 2

FALSE

T or F: There is unanimous agreement that economic growth is both desirable and sustainable.

FALSE

What is the difference between financial investment and economic investment?

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

Prices tend to be sticky because

Firms are worried that frequent price changes would annoy consumers.

Which of the following results from firms holding inventories?

Firms can maintain production levels and adjust inventories in response to demand shocks.

Assume that the size of the underground economy increases both absolutely and relatively over time. As a result,

GDP will tend to increasingly understate the level of output through time.

The smallest component of aggregate spending in the United States is

Net Exports

What is the difference between financial investment and economic investment?

Resources are devoted to increasing future output.

T or F: An economy with an average growth rate of 10 percent can expect to see its real GDP double in approximately 7 years.

TRUE

T or F: Demand shocks may be positive or negative

TRUE

T or F: Demand-pull inflation is usually accompanied by low unemployment and higher real output.

TRUE

T or F: Economic growth can be shown as a movement from a point on one production possibilities curve to a point on a curve located farther from the origin.

TRUE

T or F: Gross private domestic investment exceeds depreciation in an economy that experiences expanding production capacity.

TRUE

T or F: Price stickiness tends to moderate over time.

TRUE

T or F: Proponents of economic growth claim that rising living standards can lead to environmental improvements as people can afford to care more about the environment.

TRUE

T or F: The percentage change in real income can be approximated by subtracting the percentage change in the price level from the percentage change in nominal income.

TRUE

T or F: The statistic called Gross Output (GO) is bigger than GDP, because GO sums up the values in all stages of a productive economy, whereas GDP accounts only for the final stage.

TRUE

T or F: The term "economic investment" refers only to money spent purchasing newly created capital goods such as factories, tools, and warehouses.

TRUE

T or F: Unanticipated inflation benefits debtors at the expense of creditors.

TRUE

T or F: Within the circular flow model, the level of total resource income and total spending on output will be approximately equal.

TRUE

Which of the following markets is most likely to exhibit extremely flexible prices?

The oil market

Prices are particularly sticky:

When there are widespread macroeconomic and monetary disturbances in the economy.

T or F: If the real interest rate and the nominal interest rate are both negative and equal to each other, then the

inflation premium is zero.

Which of the following statistics can turn negative?

inflation rate

Technological advances that contribute to economic growth include the following, except

innovative digital gadgets for consumers.

Unlike demand-pull inflation, cost-push inflation

is self-limiting

Proponents of economic growth say that pollution

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

In 2014, output (GDP) per person in the U.S. was about

$54,000

Which of the following is not an explanation put forward to explain the recent productivity slowdown?

A massive influx of immigrant labor has caused the labor force to expand much faster than real GDP.

The overall behavior of the economy:

Differs over time as prices become increasingly flexible in the months and years following a shock.

Suppose a small economy produces only HDTV sets. In year one, 100,000 sets are produced and sold at a price of $1,200 each. In year two, 100,000 sets are produced and sold at a price of $1,000 each. As a result,

Nominal GDP decreases, while real GDP stays constant/

Suppose a small economy produces only MP3 players. In year one, 10,000 MP3 players are produce and sold at a price of $100 each. In year two, 12,000 MP3 players are produced and sold at a price of $80 each. Which of the following statements is true?

Real GDP increases while nominal GDP decreases.

Reasons for the rise in productivity growth between 1995 and 2010 include the following, except

a decline in population

Which of the following is not an adjustment made when comparing standards of living across countries?

adjusting for different unemployment rates across countries

Inflation is undesirable because it

arbitrarily redistributes real income and wealth.

The unemployed are those people who

are not employed but are seeking work.

According to the Bureau of Labor Statistics, to be officially unemployed a person must

be in the labor force.

GDP can be calculated by summing

consumption, investment, government purchases, and net exports.

Some economists prefer to use the term business fluctuations rather than business cycles to describe the historical growth record in the United States because

cycles implies regularity, while fluctuations does not.

Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, all else equal, the official unemployment rate would

decline

When a recession begins and unemployment begins to rise, the demand for goods and services will fall. If the decline in demand is precipitous, which of the following will occur?

deflation

Inflation caused by an increase in aggregate spending is referred to as

demand-pull inflation.

National income is the sum of employee compensation, profits, and the following items, except

depreciation or consumption of fixed capital.

The gross domestic product is not a good measure of the standard of living in a nation because it

does not account for the size of the population.

In the expenditures approach of national income accounting, C, Ig, and G include expenditures for

domestically produced as well as imported goods and services.

Transfer payments are

excluded when calculating GDP because they do not reflect current production.

When an economy's production capacity is expanding,

gross domestic investment exceeds depreciation.

A cumulative wage-price spiral that produces very rapid inflation is called

hyperinflation.

Harry's Pepperoni Pizza Parlor produced 10,000 large pepperoni pizzas last year that sold for $10 each. This year Harry's again produced 10,000 large pepperoni pizzas (identical to last year's pizzas) but sold them for $12 each. 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.

Historically, the total amount of real capital per worker in the United States has

increased significantly and made labor more productive.