Practice Questions

Consider two items that might be included in GDP: (1) the estimated rental value of owneroccupied housing and (2) purchases of newlyconstructed homes. How are these two items accounted for when GDP is calculated? a. Both item (1) and item (2) are included in the consumption component of GDP. b. Item (1) is included in the consumption component of GDP, while item (2) is included in the investment component of GDP. c. Item (1) is included in the investment component of GDP, while item (2) is included in the consumption component of GDP. d. Only item (2) is included in GDP, and it is included in the investment component.

B. Item (1) is included in the consumption component of GDP, while item (2) is included in the investment component of GDP.

From 2009 to 2010, the CPI for education increased from 279.3 to 281.8. What was the inflation rate for education between 2009 and 2010? a. 0.9% b. 9.0% c. 2.5% d. 90%

a. .9

On the basis of theory and empirical evidence, economists have reached several conclusions about economic growth. Which of the following is not one of these conclusions? a. A relatively simple way to increase growth rates permanently is to increase a country's saving rate. b. Growth is generally inhibited rather than promoted by policies like protective tariffs. c. Well-established property rights that are enforced by fair and efficient courts are important to economic growth. d. Countries with few domestic natural resources still have opportunities for economic growth.

a. A relatively simple way to increase growth rates permanently is to increase a country's saving rate.

In the equation Y = C + I + G + NX, a. Y represents the economy's total expenditure. b. C represents household expenditures on services and durable goods. c. all of the variables are always positive numbers. d. All of the above are correct

a. Y represents the economy's total expenditure.

Refer to Scenario 25-1. If the production function has the constant-returns-to-scale property, then it can be rewritten as a. Y/L = AF(1, K/L, H/L, N/L) b. Y/L = AF(L, 1, H/L, N/L) c. Y/L = AF(L, K/L, 1, N/L) d. Y/L = AF(L, K/L, H/L, 1)

a. Y/L = AF(1, K/L, H/L, N/L)

Minimum-wage laws can keep wages a. above equilibrium and cause a surplus of labor. b. above equilibrium and cause a shortage of labor. c. below equilibrium and cause a surplus of labor. d. below equilibrium and cause a shortage of labor.

a. above equilibrium and cause a surplus of labor

One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI a. fails to measure all changes in the quality of goods. b. displays a housing bias. c. accounts for changes in prices of some goods, but prices of certain goods are assumed to remain constant. d. All of the above are correct

a. fails to measure all changes in the quality of goods.

Suppose that a new government is elected in Eurnesia. The new government takes steps toward improving the court system and reducing government corruption. The citizens of Eurnesia 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 Eurnesia. b. raise real GDP per person but not productivity in Eurnesia. c. raise productivity but not real GDP per person in Eurnesia. d. raise neither productivity nor real GDP per person in Eurnesia.

a. raise real GDP per person and productivity in Eurnesia

After adjusting for inflation, over time the prices of most natural resources have been a. steady or falling, meaning that our ability to conserve them is growing more rapidly than their supplies are dwindling. b. steady or falling, meaning that their supplies are dwindling more rapidly than our ability to conserve them is growing. c. rising, meaning that our ability to conserve them is growing more rapidly than their supplies are dwindling. d. rising, meaning that their supplies are dwindling more rapidly than our ability to conserve them is growing

a. steady or falling, meaning that our ability to conserve them is growing more rapidly than their supplies are dwindling

Suppose OPEC succeeds in raising world oil prices by 300 percent. This price increase causes inventors to look at alternative sources of fuel for internal-combustion engines. A hydrogen-powered engine is developed which is cheaper to operate than gasoline engines. Which problems in the construction of the CPI does this situation represent? a. substitution bias and introduction of new goods b. introduction of new goods and unmeasured quality change c. substitution bias and unmeasured quality change d. income bias and substitution bias

a. substitution bias and introduction of new goods

A U.S.-owned automobile factory uses $100,000 worth of parts purchased from foreign countries along with U.S. inputs to produce 30 cars worth $20,000 each. Twenty of these cars are sold and 10 are left in inventory. How much did these actions add to GDP? a. $300,000 b. $500,000 c. $600,000 d. $700,000

b. $500,000

If you were to start a business delivering documents, you might need to purchase cell phones, bicycles, desks, and chairs. a. These purchases are called capital investment. If you raise the funds to purchase them from others you are a saver. b. These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower. c. These purchases are called consumption. If you raise the funds to purchase them from others you are a saver. d. These purchases are called consumption. If you raise the funds to purchase them from others you are a borrower

b. These purchases are called capital investment. If you raise the funds to purchase them from others you are a borrower.

Which of the following is not correct? a. A union is a worker association that bargains with employers over wages, benefits, and working conditions. b. Unions play a much larger role in the U.S. labor market now than they did in the past. c. Unions play a large role in many European countries. d. A union is a type of cartel.

b. Unions play a much larger role in the U.S. labor market now than they did in the past

Other things the same, the effects of an increase in transfer payments on the government's budget deficit will lead to a. greater investment. b. a higher interest rate. c. higher public saving. d. All of the above are correct

b. a higher interest rate

Which of the following is an example of an efficiency wage? a. a high wage paid to compensate for dangerous work such as coal mining b. an above-equilibrium wage offered by a firm to attract a more talented pool of job applicants c. a wage below the minimum wage but supplemented by customer tips d. a high wage paid to a college graduate for a high-skill job such as electrical engineering

b. an above-equilibrium wage offered by a firm to attract a more talented pool of job applicants

The GDP deflator reflects the a. level of prices in the base year relative to the current level of prices. b. current level of prices relative to the level of prices in the base year. c. level of real output in the base year relative to the current level of real output. d. current level of real output relative to the level of real output in the base year

b. current level of prices relative to the level of prices in the base year.

If your firm's production function has constant returns to scale, then if you double all your inputs, your firm's output will a. double and productivity will rise. b. double but productivity will not change. c. more than double and productivity will rise. d. more then double but productivity will not change.

b. double but productivity will not change

In a closed economy, national saving is a. usually greater than investment. b. equal to investment. c. usually less than investment because of the leakage of taxes. d. always less than investment.

b. equal to investment.

A municipal bond is a. issued by the federal government. b. issued by state and local governments. c. issued by corporations. d. issued by households

b. issued by state and local gov.

The slope of the demand for loanable funds curve represents the a. positive relation between the real interest rate and investment. b. negative relation between the real interest rate and investment. c. positive relation between the real interest rate and saving. d. negative relation between the real interest rate and saving.

b. negative relation between the real interest rate and investment

Suppose that dental hygienists are unionized in the eastern region of the country but not in the western region. If the unionized workers in the eastern region abolished their unions, employment a. and wages of dental hygienists in the eastern region would rise. b. of dental hygienists in the eastern region would rise, but wages of dental hygienists in the eastern region would fall. c. and wages of dental hygienists in the eastern region would fall. d. of dental hygienists in the eastern region would fall, but wages of dental hygienists in the eastern region would rise.

b. of dental hygienists in the eastern region would rise, but wages of dental hygienists in the eastern region would fall.

Countries that grew the fastest over the last 100 or so years had average growth rates of real income per person of about a. 1.5 percent per year. b. 2.0 percent per year. c. 2.5 percent per year. d. 3.0 percent per year.

c. 2.5 percent per year

Which of the following could explain a decrease in the equilibrium interest rate and an increase in the equilibrium quantity of loanable funds? a. The demand for loanable funds shifted rightward. b. The demand for loanable funds shifted leftward. c. The supply of loanable funds shifted rightward. d. The supply of loanable funds shifted leftward.

c. The supply of loanable funds shifted rightward.

You sell cupcakes. One day you double the time you spend and double all your inputs, and make twice as many cupcakes. Your cupcake production function has a. decreasing returns to scale. b. zero returns to scale. c. constant returns to scale. d. increasing returns to scale.

c. constant returns to scale

The CPI differs from the GDP deflator in that a. the CPI is a price index, while the GDP deflator is an inflation index. b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator. c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator. d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator

c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator

Last year a country had 800 workers who worked an average of 8 hours and produced 12,800 units. This year the same country had 1000 workers who worked an average of 8 hours and produced 14,000 units. This country's productivity was a. higher this year than last year. A possible source of this change in productivity is a change in the size of the capital stock. b. higher this year than last year. A change in the size of the capital stock does not affect productivity. c. lower this year than last year. A possible source of this change in productivity is a change in the size of the capital stock. d. lower this year than last year. A change in the size of the capital stock does not affect productivity.

c. lower this year than last year. A possible source of this change in productivity is a change in the size of the capital stock

Y = C + I + G + NX is an identity because a. each symbol identifies a macroeconomic variable. b. the right-hand and left-hand sides are equal when an equilibrium is reached. c. the equality holds due to the way the variables are defined. d. None of the above is correct.

c. the equality holds due to the way the variables are defined.

Unemployment insurance a. may improve the ability of the economy to match workers with appropriate jobs. b. reduces the job search efforts of the unemployed. c. increases the amount of frictional unemployment in the economy. d. All of the above are correct

d. All of the above are correct

Minimum wage laws... a. reduce unemployment b. cause labor shortages, which further raise wages above equilibrium c. affect highly-educated workers more than high school dropouts d. None of the above are correct

d. None of the above are correct

Educated people may generate ideas that increase production. These ideas a. produce a return to society from education that is greater than the return to the individual. b. could justify government subsides for education. c. are external benefits of education. d. All of the above are correct.

d. all of the above are correct

Which of the following domestically produced items is not included in GDP? a. a bottle of shampoo b. a hairdryer c. a haircut d. All of the above are included in GDP.

d. all of the above are included in GDP

In the basket of goods that is used to compute the consumer price index, which of the following categories of consumer spending is the smallest? a. food & beverages b. recreation c. housing d. apparel

d. apparel

President Bigego is running for re-election against Senator Pander. Bigego proclaims that more people are working now than when he took office. Pander says that the unemployment rate is higher now than when Bigego took office. You conclude that a. one of them must be lying. b. both of them could be telling the truth if the labor force, and employment grew at the exact same rate. c. both of them could be telling the truth if the labor force grew slower than employment. d. both of them could be telling the truth if the labor force grew faster than employment.

d. both of them could be telling the truth if the labor force grew faster than employment.

If there are diminishing returns to capital, then a. capital produces fewer goods as it ages. b. old ideas are not as useful as new ones. 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

In the United States in the late 1970s, nominal interest rates were high and inflation rates were very high. As a result, real interest rates were a. very high. b. high. c. low, but never negative. d. low, and in some years they were negative.

d. low, and in some years they were negative.

Productivity is the amount of goods and services a. an economy produces. It is not linked to a nation's economic policies. b. an economy produces. It is linked to a nation's economic policies. c. produced for each hour of a worker's time. It is not linked to a nation's economic policies. d. produced for each hour of a worker's time. It is linked to a nation's economic policies.

d. produced for each hour of a worker's time. It is linked to a nation's economic policies

You know that a candy bar costs sixty cents today. You also know the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices? a. sixty cents (today's CPI - 1962 CPI) b. sixty cents (1962 CPI - today's CPI) c. sixty cents (today's CPI / 1962 CPI) d. sixty cents (1962 CPI / today's CPI)

d. sixty cents (1962 CPI / today's CPI)

If total spending rises from one year to the next, then which of the following could not be true? a. the economy is producing a smaller output of goods and services, and goods and services are selling at higher prices. b. the economy is producing a larger output of goods and services, and goods and services are selling at lower prices. c. the economy is producing a larger output of goods and services, and goods and services are selling at higher prices. d. the economy is producing a smaller output of goods and services, and goods and services are selling at lower prices.

d. the economy is producing a smaller output of goods and services, and goods and services are selling at lower prices.

Refer to Figure 25-1. Choose a point anywhere on the curve and call it point A. If the economy is at point A in 2011, then it will definitely remain at point A in 2012 if, between 2011 and 2012, a. the quantity of physical capital remains constant; the number of workers doubles; and human capital, natural resources, and technology all double as well. b. the quantity of physical capital doubles; human capital, natural resources, and technology all double as well; and the number of workers remains constant. c. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology all double as well. d. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology remain constant.

d. the quantity of physical capital doubles; the number of workers doubles; and human capital, natural resources, and technology remain constant.