Test 1 Review

List three things that can cause an increase in demand. Be specific.

(1.) An increase in income (normal good). (2.) A decrease in income (inferior good). (3.) An increase in the price of a substitute good. (4.) A decrease in the price of a complementary good. (5.) A change in preferences (the product is more desirable than before).

Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's GDP deflator in year 1 is?

GDP Deflator (Year 1) = (Nominal GDP year 1) / (Real GDP year1) * 100 = ((50 * $1.00) + (100 * $0.60)/ (50 * $1.00) + (100 * $0.60)) * 100 (110/110) * 100 = 100

Refer to Table 6.4. The value for GNP in billions of dollars is?

GNP = GDP + Receipts of factor income from the rest of the world + payments of factor income to the rest of the world GNP = $1050 + 40 - 40 = $1,050

Assume that GDP is $9 Trillion, receipts of factor income from the rest of the world are $2 Trillion, and payments of factor income to the rest of the world are $1 Trillion. Calculate GNP from this information.

GNP = GDP +factor payments from the rest of the world - factor payments to the rest of the world. Therefore GNP = $9 trillion + $2 Trillion - $1 Trillion = $10 trillion.

If NNP is $7 trillion, net investment is $500 billion and gross investment is $1 trillion determine the level of GNP.

GNP = NNP + depreciation; depreciation = gross investment - net investment ($1 trillion - $500 billion) Therefore GNP = $7 trillion + $500 billion = $7.5 trillion.

4) When the price of good X rises, the demand for good Y falls. Explain what this relationship implies about the two goods.

Goods X and Y must be complements. When the price of good X rises, the quantity of good X demanded will fall. If the demand for Y also falls, the two goods must be used together.

When the price of good X rises, the demand for good Y rises. Explain what this relationship implies about the two goods.

Goods X and Y must be substitutes. When the price of good X rises, the quantity of good Y demanded will rise

Suppose that net investment in 2012 was $90 billion and depreciation was $27 billion. Gross investment in 2012 was?

Gross investment = Net investment + Depreciation = $90 + $27 = $117

Suppose there are 10 million unemployed out of a labor force of 100 million. This means an unemployment rate of 10/100 = .10, or 10 percent. Recalculate the unemployment rate if 1 million of these 10 million unemployed workers stop looking for work.

If 1 million of these 10 million unemployed people stopped looking for work and dropped out of the labor force then 9 million would be unemployed out of a labor force of 99 million. The unemployment rate would then drop to 9/99 = .091, or 9.1 percent.

Suppose that the equilibrium rent for a two-bedroom apartment in downtown Chicago is $900 per month. The city council decides to place a price ceiling on apartments and will not allow landlords to charge more than $700 per month. Draw this situation using a graph. Make sure that you show the original equilibrium and the effect of the price ceiling on the market. What will happen in this market?

There will be a shortage of apartments because quantity demanded (QD) isgreater than quantity supplied (QS).

Refer to Table 7.2. What is the total number of people unemployed?

Unemployment Rate: Unemployed/Labor force Unemployed = Unemployment rate * Labor force = 0.05 * 120 = 6

Refer to Table 7.1. What is the unemployment rate is?

Unemployment Rate: Unemployed/Labor force 5,000/100,000 = 0.05 = 5%

Define the following: market equilibrium, surplus, and shortage.

When a market is in equilibrium, quantity supplied is equal to quantity demanded. If quantity supplied is greater than quantity demanded, there is a surplus. If quantity demanded is greater than quantity supplied, there is a shortage.

Suppose you want to earn a 7% rate of return on a one-year loan you are about to make and the expected inflation rate for the duration of the loan is 5%. How much interest should be charged? Secondly, suppose that your forecasts are 2% below the actual level. What would happen to your real rate of return? What if you overestimated inflation by 2%.

You would need to assess an interest rate of 12% to earn 7%. The 5% is simply an inflation premium. However, if you underestimate inflation by 2% your real rate of return will only be 5% not 7%. Likewise, if you overestimate the inflation rate you will be in the happy circumstance of earning a 9% rate of return (12% - 3%).

SCENARIO 1: Graphically illustrate each of the following effects on the market for home fitness equipment with supply and demand curves. State the effects on price and quantity. Consider each effect separately Refer to Scenario 1. The cost of steel used in the production of many of the exercise products Increases

Prices of home fitness equipment will rise, but the equilibrium quantity will fall.

John's income has just increased by $10,000 per year. If Ramen noodles is an inferior good in John's opinion, what will happen to his demand for Ramen noodles? Show your answer using a graph.

Since Ramen noodles is an inferior good for John, his demand for ramen noodles will decrease when his income rises. Therefore, his demand curve will shift to the left.

Celia wants to make an 8% real return on a loan that she is planning to make, and the expected inflation rate during the period of the loan is 5%. She should charge an interest rate of

Stated Interest rate = Real interest rate + Inflation rate = 8 + 5 = 13%

If the GDP deflator next year is less than the GDP deflator this year, then the price level has fallen. T/F

T GDP measures the rate of inflation or changes in the average price of goods and services. Therefore if GDP next year is less than the price level has fallen

If in the same period output doubles and the price level remains the same, nominal GDP doubles. T/F

T Nominal GDP is GDP in current dollars so if output doubles and the price level remains the same then nominal GDP also doubles.

GDP measured in base year prices is real GDP. T/F

T Real GDP is nominal GDP adjusted for price changes using prices in the base year

If real GDP increased during a year, then output must have increased. T/F

T Real GDP measures output growth.

Draw a hypothetical example of the demand curve for gasoline and explain it.

The demand curve shows the negative relationship between prices and the quantity demanded. As the price of gasoline falls the quantity of gasoline demanded rises

Explain the law of demand. What does it imply about the shape of the demand curve?

The law of demand describes the inverse relationship between price and quantity demanded. All else equal, as the price of a good rises, the quantity demanded of the good will fall. As the price of a good falls, the quantity demanded rises. This implies that the demand curve will be downward sloping.

Draw a supply curve for a hypothetical firm and explain the relationship.

The supply curve shows that price and quantity supplied are directly related. As the price of the product rises the firm increases the quantity supplied

Calculate value added at each stage of production

The value added is $20, $40, $30 and $20 respectively.

What relationship is shown by a supply curve?

A supply curve shows the relationship between price and quantity supplied. Because price and quantity supplied are directly related, the supply curve is upward sloping.

Refer to Table 6.5. (2)Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's real GDP in year 2 is A) $168. B) $179. C) $202. D) $214

A. (80* $1.00) + (110* $0.80) = $168

Show graphically (in two separate graphs) the effects of an increase in the price of peanut butter on the demand for peanut butter and on the demand for jelly.

An increase in the price of peanut butter causes a decrease in the quantity of peanut butter demanded. This is shown by a movement along the demand curve for peanut butter from point A to point B. Since peanut butter and jelly are complements, an increase in the price of peanut butter will cause a decrease in the demand for jelly. This is shown by a shift in the demand curve for jelly to the left.

Show graphically the effect of an increase in the wage paid to autoworkers on the supply of new cars.

An increase in wage paid to autoworkers would increase the cost of producing a new car. Therefore, the supply of new cars will decrease.

Gross domestic product measured in terms of the prices of a fixed, or base, year is A) base GDP. B) real GDP. C) current GDP. D) nominal GDP.

B

The GDP deflator is the A) difference between real GDP and nominal GDP multiplied by 100. B) ratio of nominal GDP to real GDP multiplied by 100. C) ratio of real GDP to nominal GDP multiplied by 100. D) difference between nominal GDP and real GDP multiplied by 100.

B

The value of all motorcycles produced by Harley Davidson in the United States is A) included in the U.S. GDP but not the U.S. GNP. B) included in both the U.S. GDP and GNP. C) included in the U.S. GNP but not the U.S. GDP. D) not included in either the U.S. GDP or GNP.

B

Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 2 is A) $168. B) $179. C) $202. D) $214.

B (80*$1.00) + 110* $0.90) = $179

Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's GDP deflator in year 1 is A) 1. B) 100. C) 110. D) 111.

B GDP deflator in the base year is always 100 (Nominal Year 1 / Real Year 1) * 100 = (140/140) * 100 = 100

The GDP deflator in year 2 is 110 and the GDP deflator in year 3 is 118. The rate of inflation between years 2 and 3 is A) 4.55%. B) 7.27%. C) 8%. D) 18%.

B The inflation rate between years 2 and year 3 is the percent change in the GDP deflator between year 2 and year 3 (118 - 110)/110 = 7.27%

Real GDP is gross domestic product measured A) in current dollars. B) as the difference between the current year's GDP and last year's GDP. C) in the prices of a base year. D) at a constant output level but at current prices.

C

Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's GDP deflator in year 2 is A) 93.9. B) 100. C) 106.5. D) 179.

C (Nominal Year 2 / Real Year 2) * 100 = (179/168) * 100 = 106.5

If the GDP deflator is greater than 100, then A) nominal GDP is lower than real GDP. B) prices decreased by more than half between the current and the base years. C) nominal GDP is greater than real GDP. D) nominal GDP equals real GDP.

C GDP deflator is the ratio of nominal GDP to Real GDP multiplied by 100. Therefore if GDP deflator is greater than 100, it means nominal GDP is greater than real GDP and there is an increase in the overall price level.

If nominal GDP is $8 trillion and real GDP is $6 trillion, the GDP deflator is A) 48. B) 75. C) 133.33. D) 480.

C Nominal GDP / Real GDP ) * 100 = 133.3

Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's inflation rate between year 1 and year 2 is A) -6.1%. B) -5.5%. C) 6.5%. D) 79

C Since year 1 is the base year, the GDP deflator in year 1 is 100. Also GDP deflator in year 2 is 106.5 calculated above. Therefore the inflation rate between year 1 and year 2 is the percent change in the GDP deflator between year 1 and year 2. (106.5 - 100)/100 = 6.5%

Refer to Table 6.1. The value for net exports in billions of dollars is?

Exports-Imports = 300-100 = 200

If real GDP rises, then so must nominal GDP. T/F

F If the price level falls below prices of the base year, nominal GDP falls relative to real GDP

If nominal GDP rises, then so must real GDP. T/F

F If the price level rises above prices of the base year, nominal GDP rises relative to real GDP

A GDP deflator is real GDP divided by nominal GDP times 100. T/F

F GDP deflator is nominal GDP divided by Real GDP times 100

Refer to Table 6.1. The value of government spending in billions of dollars is?

Federal purchase of goods + State and Local purchases of goods = 350 +100 = 450

Refer to Table 6.4. The value for GDP in billions of dollars is?

GDP = C + I + G + (EX-IM) GDP = 700 + (160 + 20) + 150 + (70-50) = 700 + 180 + 150 + 20 = $1,050

In 2012 final sales equal $400 billion, and the change in business inventories is $100 billion. GDP in 2012 is?

GDP = Final sales + change in business inventories = $400 + $100 = $500 billion

A company produced 12 motorcycles in 2010. The company sold 8 in 2010 and added 4 to its inventories. The market value of the motorcycles in 2010 was $1,000 per unit. What is the value of this company's output that will be included in the 2010 GDP?

GDP = Final sales + change in business inventories = (8*$1000) + (4*$1000) = $12,000

Write out the formula for calculating GDP using the income approach.

GDP = National Income + Depreciation + (Indirect Taxes - Subsidies) + Net Factor Payments to the Rest of the World.

Refer to table about supply and demand of pencils: (a.) What is the equilibrium price and quantity? How can you tell? (b.) Suppose the current price is $0.20. What situation is present? Will the price remain at $0.20? Why or why not?

(a.) The equilibrium price is $0.50 and the equilibrium quantity is 12,000 pencils. Market equilibrium occurs where quantity demanded is equal to quantity supplied. (b.) At a price of $0.20, quantity demanded (18,000) is greater than quantity supplied (3,000). Therefore, we have a shortage of 15,000 pencils. This will put upward pressure on the price (eventually pushing price to the market equilibrium of $0.50).

The market for restaurant pizza in Chicago is currently in equilibrium at a price of $8 and 2,000 pizzas are sold each day. Explain what will happen to the equilibrium price and quantity of pizzas sold and why (which curve has changed) for each of the following situations: (a.) Delivery personnel form a labor union and secure a higher wage of $7.50 per hour (a large increase in their wage). (b.) Fast-food hamburger restaurants (Burger King & McDonalds) cut their prices in half.

(a.) The increase in wage will lead to an increase in the cost of producing pizzas. Therefore, the supply of pizza will decrease, causing the equilibrium price to rise and the equilibrium quantity to fall. (b.) The drop in price of fast-food hamburgers will lower the demand for pizza because pizza and hamburgers are substitute goods. Therefore, both the equilibrium price and equilibrium quantity will fall.

Nominal GDP measures the value of all goods and services A) in current dollars. B) in constant dollars. C) in fixed dollars. D) without inflation.

A

Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 1 is A) $140 B) $160 C) $180. D) $200.

A (60 *$1.00) + (100*$0.80) = $140

The GDP deflator in year 2 is 95 using year 1 as a base year. This means that, on average, the price of goods and services is A) 5% higher in year 1 than in year 2. B) 105% higher in year 2 than in year 1. C) 105% higher in year 1 than in year 2. D) 5% higher in year 2 than in year 1.

A If GDP deflator in year 2 is 95, it means that the price of goods and services is 5% higher in year 1 than in year2

When the price of compact disc players decreases, the demand for compact discs rises while the demand for cassette tapes decreases. What does this imply about the relationship between compact disc players, compact discs, and cassette tapes?

Compact disc players and compact discs must be complements. Compact disc players and cassette tapes must be substitutes.

If real GDP in 2012 using 2011 prices is higher than nominal GDP of 2012, then A) Prices in 2012 are higher than prices in the base year. B) Nominal GDP in 2012 equals nominal GDP in 2011. C) Real GDP in 2012 is larger than real GDP in 2011. D) Prices in 2012 are lower than prices in the base year.

D

If real GDP in 2012 using 2011 prices is lower than nominal GDP of 2012, then A) Real GDP in 2012 is larger than real GDP in 2011. B) Prices in 2012 are lower than prices in 2011. C) Nominal GDP in 2012 equals nominal GDP in 2011. D) Prices in 2012 are higher than prices in 2011.

D

Nominal GDP is gross domestic product measured A) at a constant output level but at the base-year prices. B) as the difference between the current year's GDP and last year's GDP. C) in the prices of a base year. D) in current dollars

D

Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 3 is A) $204. B) $222. C) $250. D) $270

D (100* $1.40) + (130*$1.00) = $270

The GDP deflator in year 2 is 110 using year 1 as a base year. This means that, on average, the price of goods and services is A) 5% higher in year 1 than in year 2. B) 110% higher in year 2 than in year 1. C) 110% higher in year 1 than in year 2. D) 10% higher in year 2 than in year 1.

D Since year 1 is the base year, the GDP deflator of 110 in year 2 tells us that the prices of goods and services are 10% higher in year 2 than in year 1

Refer to Table 7.1. The labor force equals

Labor Force = Employed + Unemployed = 95,000 + 5,000 = 100,000

Refer to Table 7.2. How much is the labor force?

Labor force participation rate: Labor force/ Population Labor force = Labor force participation rate * Population = 0.60 * 200 = 120

Refer to Table 7.1. What is the labor-force participation rate?

Labor force participation rate: Labor force/ Population: 100,000/180,000 = 0.555 = 56%

Refer to Table 6.4. The value for NNP in billions of dollars is?

NNP = GNP - Depreciation = $1,050 - $20 = $1,030

Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's real GDP in year 2 is?

Nominal GDP = (50 *$1.00) + (120 * $0.60) = $50 + $72 = $122

Refer to Table 6.5. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 2 is?

Nominal GDP = (50 *$1.20) + (120 * $0.60) = $60 + $72 = $132

SCENARIO 1: Graphically illustrate each of the following effects on the market for home fitness equipment with supply and demand curves. State the effects on price and quantity. Consider each effect separately Refer to Scenario 1. "Infomercials" advertising home fitness equipment begin to run at night on Cable TV stations.

Price of home fitness equipment will increase as will quantities.

SCENARIO 1: Graphically illustrate each of the following effects on the market for home fitness equipment with supply and demand curves. State the effects on price and quantity. Consider each effect separately. Refer to Scenario 1. Assume that the price of dues in local health clubs decreases

Prices of home equipment will fall as will the equilibrium quantity.

SCENARIO 1: Graphically illustrate each of the following effects on the market for home fitness equipment with supply and demand curves. State the effects on price and quantity. Consider each effect separately Refer to Scenario 1. Health clubs begin to offer extras to make going to health clubs easier, such as free parking and baby-sitting to encourage family memberships

Prices of home fitness equipment will fall as will the equilibrium quantity.