UNIT 2 Exam- Chapters 6-9 Review

Review Question (6.6): T/F Because price stickiness matters only in the short run, economists are comfortable using just one macroeconomics model for all situation.

False They use: - Aggregate expenditure models- short-run model and assumes perfectly inflexible prices - Aggregate demand-aggregate supply model- allows for flexible prices and is useful for understanding how the economy behaves over longer periods of time.

Consider This (6) - Economic vs Financial Investments How does an economist view investment?

Financial investments capture what ordinary people mean when they say investment- the purchase of assets (stocks, bonds, and real estate in hope of economic gain). These are not considered investments to economists. When economists say "investment" they are referring to economic investments, which relates to the expansion of the economy's productive capacity.

Consider This (6)- the Great Recession

In 2008 and 2009, the United States encountered the Great Recession (the worst economic crisis since the Great Depression in the 1930s). It was triggered by a steep decline in housing prices and a crisis involving mortgage loans. Buzzer's Auto prices are inflexible. They established their production capacity and set their expectation of product demand on the basis of normal times. But the demand for their goods and services fell unexpectedly because of greater consumer difficulty in getting loans, declining consumer confidence, and declining incomes. Output dropped, employment plummeted, and unemployment soared.

Consider This 8.1- Patents and Innovation It costs the US and Europe drug companies 1 Billion to research, patent, and safety test a new drug. Because of the high cost, they rely on patent protections to give them a monopoly and sell the new drug for 20 years.

Leads to disputes between leader and follower countries over patented drugs because follower countries do not recognize the patents offered to pharmaceutical companies. For example: India allow drug companies to sell and copy drugs that were developed and patented by the US. This benefits Indian consumers because the competition among local producers lowers the price. But it also makes it unprofitable for Indian producers to innovate a new drug.

(6.10) Shocks to the economy occur a. when expectations are unmet b. whenever the price level changes c. whenever government implements fiscal or monetary policy d. because most economic behavior is unpredictable.

a. when expectations are unmet Explanation: Future is uncertain; expectations affect investments. Changing expectations have an effect on current behavior and, therefore, economic growth. Unmet expectations are shocks. There are demand and supply shocks which can either be good or bad.

Review Question (6.1): An increase in _________ GDP guarantees that more goods and services are being produced by an economy. a. nominal b. real

b. real

(6.6) When economists refer to "investment," they are describing a situation where a. people are buying shares of corporate stock b. resources are devoted to increasing future output. c. money is saved in a bank account d. financial assets are purchased in the hope of a monetary gain.

b. resources are devoted to increasing future output. Explanation: Investment occurs when resources are devoted to increasing future output; savings provides the means to invest. - Financial Investment- purchasing assets in hopes of financial gain - Economic Investment- spending on production and accumulation of newly created capital goods.

(6.16) Which of the following statements best describes price flexibility in the economy? a. Prices tend to be sticky in the short run and stuck in the long run. b. Prices tend to be just as sticky in the short run as in the long run. c. Prices tend to be sticky in the short run but become more flexible over time. d. Prices tend to be flexible in the short run but become more sticky over time.

c. Prices tend to be sticky in the short run but become more flexible over time.

The historical reallocation of labor from agriculture to manufacturing in the United States has a. been inflationary. b. had no effect on the average productivity of labor. c. increased the average productivity of labor. d. reduced the average productivity of labor.

c. increased the average productivity of labor. Explanation: Why the rise in productivity growth? •Microchip and information technology •Start-up firms •Increasing returns from: •More specialized inputs •Spreading of development costs •Simultaneous consumption •Network effects •Learning by doing •Global competition

Suppose a nation's nominal GDP is $972 billion and the general price index is 90. To make this year's GDP comparable with an earlier base year's GDP, then this year's GDP must be a. deflated to $678 billion. b. deflated to $896 billion. c. inflated to $1,080 billion. d. deflated to $1,080 billion.

c. inflated to $1,080 billion.

Suppose total output (real GDP) is $10,000 and worker-hours are 20,000. We can conclude that a. real GDP per capita must be $200,000. b. the price-level index must be less than 100. c. labor productivity must be $0.50. d. nominal GDP must be between $10,000 and $20,000.

c. labor productivity must be $0.50.

Most economists agree that the immediate determinant of the volume of output and employment is the a. composition of consumer spending. b. ratio of public goods to private goods production. c. level of total spending. d. size of the labor force.

c. level of total spending.

The largest component of total expenditures in the United States is a. net exports. b. government purchases. c. personal consumption. d. gross investment.

c. personal consumption.

Review Question (6.4): If an economy has fully flexible prices and demand unexpectedly increases, you would expect the economy's real GDP to: a. increase b. decrease c. remain the same

c. remain the same

Nominal GDP is adjusted for price changes using a. the Consumer Price Index (CPI). b. the Producer Price Index (PPI). c. the GDP price index. d. exchange rates.

c. the GDP price index.

Between 1950 and 2018, U.S. real GDP per capita grew at an average annual rate of about a. 5.5 percent. b. 4.2 percent. c. 3.2 percent. d. 2.0 percent.

d. 2.0 percent.

Unemployed 7 Total Population 145 Employed 95 Discouraged Workers 3 The table contains information about the hypothetical economy of Scoob. All figures are in millions. The unemployment rate in Scoob is a. 2.5 percent. b. 3.2 percent. c. 5.0 percent. d. 6.9 percent.

d. 6.9 percent. Explanation: Finding Unemployment Rate Unemployment Rate= # of unemployed/ work force x 100

(6.14) For which of the following goods are services prices least sticky? a. newspapers b. haircuts c. microwave ovens d. airline tickets

d. airline tickets Explanation: Prices for most commodities are flexible (Example: corn, oil, natural gas). But prices of most final goods and services are sticky (average of 4.3 months).

Global Perspective 7.2- the Underground Economy as a Percentage of GDP, Selected Nations, 2015

1. Nigeria

Global Perspective 8.1- Average Test Scores of Eighth Grade Students in Math and Science- Top 10 Test-Taking Countries Who scores the highest? Where is the US?

1. Singapore for both math and science US Math- 10 US Science- 11

Global Perspective 8.2- Global Competitiveness Index Which three countries are the most competitive?

1. Switzerland 2. United States 3. Singapore

Global Perspective 6.1- GDP PER PERSON (2017) Which country has the largest GDP per person ? Where is the United States ranked? Which country has the smallest GDP per person?

1. Switzerland (wealthiest) 2. United States Burundi (poorest)

Global Perspective 7.1- Comparative GDP in Trillions of US Dollars, Selected Nations, 2017 Who has the world's highest GDP?

1. US 2. China 3. Japan

Does Inflation Affect Output?

Cost-Push inflation •Abrupt increase in resource prices leads to a reduction in real output and employment •Redistributes a decreased level of real income and output •Increased costs; increased prices; reduced quantity demanded; reduced output; increased unemployment Demand-Pull inflation •One view is that zero inflation is best: Even low levels of inflation can reduce output as hedges against inflation are sought •Another view is that mild inflation is best: full employment and economic growth depend on strong levels of spending; mild inflation is a small price to pay for full employment and growth, and avoids risk of deflation

Deflation

Deflation: decline in general price level; effects are opposite of inflation •Those on fixed income will see real income increase •Creditors will benefit at the expense of debtors •Purchasing power of accumulated savings is greater due to falling prices Mixed effects of unanticipated inflation if a person earns an income, is a saver or borrower, holds financial assets, etc. An individual may be helped in some ways and hurt in others •Nominal Incomes may rise •Fixed assets values may fall •For fixed-rate mortgages, real debt declines Arbitrariness: inflation takes from some and gives to others

Review Question (6.2): T/F The term economic investment includes purchases of stocks, bonds, and real estate.

False

Global Perspective 9.1 Rates in Five Industrial Nations

Inflation rates in the US were neither extraordinarily high or extraordinarily low relative to rates in other industrialized nations

Inflation is undesirable because it a. arbitrarily redistributes real income and wealth. b. invariably leads to hyperinflation. c. usually is accompanied by declining real GDP. d. reduces everyone's standard of living.

a. arbitrarily redistributes real income and wealth. Explanation: Who is hurt and who is not? The redistribution effects of inflation depend on whether or not it is anticipated. Fixed-income receivers (pensions, annuities) •Real incomes fall Savers •Purchasing power of accumulated savings deteriorates •Inflation rate > Interest rate Creditors •Lenders get paid back in "cheaper dollars" Who is Not Harmed? Flexible-income receivers •COLAs •Social Security recipients •Union members Debtors •Pay back the loan with "cheaper dollars" •Federal government has benefited from inflation •Debt serviced with dollars of less purchasing power than those borrowed •Nominal national income and therefore tax collections rise with inflation Business owners if product prices increase faster than resource prices

Which of the following would most likely occur during the expansionary phase of the business cycle? a. demand-pull inflation b. cost-push inflation c. structural inflation d. frictional inflation

a. demand-pull inflation Explanation: Difficult to distinguish inflation types Types differ in sustainability •Demand-pull continues as long as the excess spending continues •Cost-push ends in a recession: decreased output, decreased employment, idle resources, prices no longer bid up Core inflation •Without food and energy goods •Focuses on more stable prices

If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, actual GDP is a. $415 billion. b. $385 billion. c. $15 billion. d. $785 billion.

b. $385 billion.

Cost-push inflation a. is caused by excessive total spending.shifts the nation's production possibilities curve leftward. b. moves the economy inward from its production possibilities curve. c. is a mixed blessing because it has positive effects on real output and employment.

b. moves the economy inward from its production possibilities curve. Explanation: Demand-Pull inflation: •Excess spending (demand) relative to economy's capacity to produce; "too much spending chasing too few goods" •Central bank issues too much money Cost-Push inflation: •Due to a rise in per-unit input costs •Supply shocks

Potential Real GDP$200 Billion Natural Rate of Unemployment6 % Actual Rate of Unemployment 12 % Refer to the accompanying data, which is for a specific year in a hypothetical economy for which Okun's law is applicable. The size of the negative GDP gap as a percentage of potential GDP for the economy is a. 6 percent. b. 9 percent. c. 12 percent. d. 15 percent.

c. 12 percent.

Between 1980 and 2000, the price level approximately doubled. The average annual rate of inflation over this 20-year period was about a. 5.5 percent. b. 4.7 percent. c. 3.5 percent. d. 2.8 percent.

c. 3.5 percent.

A large negative GDP gap implies a. an excess of imports over exports. b. a low rate of unemployment. c. a high rate of unemployment. d. a sharply rising price level.

c. a high rate of unemployment. Explanation: Economic Cost of Unemployment GDP Gap •GDP gap = actual GDP - potential GDP •Can be negative or positive Okun's Law •Every 1% of cyclical unemployment creates a 2% GDP gap

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 a. fall by about 20 percent. b. fall by about 2 percent. c. rise by about 15 percent. d. rise by about 25 percent.

c. rise by about 15 percent.

If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced a. inflation of 4 percent. b. inflation of 3.33 percent. c. deflation of 3.33 percent. d. deflation of 4 percent.

c. deflation of 3.33 percent. Explanation: •Inflation is a general rise in the price level. A decline in the price level is deflation. •Inflation reduces the "purchasing power" of money. •Consumer Price Index (CPI): main measure of inflation in the US •Used to adjust Social Security benefits and income tax brackets •300 market basket items are updated every few years to reflect the purchase patterns of urban consumers, currently based on spending patterns in 2013-2014 BLS currently sets the CPI equal to 100 for 1982-1984. CPI for 2018 was 251.1 and 245.1 for 2017:

A lender need not be penalized by inflation if the a. long-term rate of inflation is less than the short-term rate of inflation. b. short-term rate of inflation is less than the long-term rate of inflation. c. lender correctly anticipates inflation and increases the nominal interest rate accordingly. d. inflation is unanticipated by both borrower and lender.

c. lender correctly anticipates inflation and increases the nominal interest rate accordingly. Explanation: Anticipated Inflation Real interest rate: % increase in purchasing power borrower pays to lender •Rate adjusted for inflation Nominal interest rate •Rate not adjusted for inflation

Potential Real GDP $200 Billion Natural Rate of Unemployment 6 % Actual Rate of Unemployment 12 % Refer to the accompanying data, which is for a specific year in a hypothetical economy for which Okun's law is applicable. If the unemployment rate in the economy fell to 6 percent, we could conclude that a. only structural unemployment remained. b. the economy's production possibilities curve shifted outward. c. the economy had moved from a point inside its production possibilities curve to a point on or very near the curve. d. nominal GDP would rise, but real GDP would fall.

c. the economy had moved from a point inside its production possibilities curve to a point on or very near the curve.

Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result, a. the official unemployment rate will fall. b. the official unemployment rate will rise. c. the official unemployment rate will remain unchanged. c. the size of the labor force will increase.

c. the official unemployment rate will remain unchanged.

Potential Real GDP $200 Billion Natural Rate of Unemployment 6 % Actual Rate of Unemployment 12 % Refer to the accompanying data, which is for a specific year in a hypothetical economy for which Okun's law is applicable. The amount of output being forgone by the economy is a. $12 billion. b. $15 billion. c. $18 billion. d. $24 billion.

d. $24 billion.

The largest component of national income is a. compensation of employees. b. rents. c. interest. d. corporate profits.

a. compensation of employees.

Last Word- Ladies First- the Substantial rise in the number of women in the paid work force in the US has been one of the major labor market trends of the past six decades. 1960- 40% of American women worked full-time or part-time paid jobs. Now- 60% of American women Women make up almost half of the workforce.

American women have become better educated and professionally trained. Rising productivity increased women's wages. These higher wages have raised the opportunity cost of staying home. Discrimination still exist; 78 cents for every dollar

Hyperinflation

Inflation rate in excess of 50%/month; compounded over a year, that's an annual rate of 13,000% Adverse Effects: Devastating impact on output and employment •Buyers and sellers have difficulty determining prices •Production falls as businesses hoard resources and stockpile finished products in anticipation of higher future prices •Investment declines as savers refuse to lend knowing that loans will be repaid in depreciating money; savers may store value in unproductive wealth such as precious metals •Money becomes worthless and people revert to barter, making exchanges more difficult •Economic and often political collapse Examples: Germany after WWI, Japan after WWII, Zimbabwe's 14.9 billion percent inflation in 2008, Venezuela's 1 million % in 2018 Causation: government expansion of the money supply creating severe demand—pull inflation Motivation: if a government cannot obtain enough revenue through taxation or borrowing to cover the desired level of spending Termination: ends when government cuts spending to level that can be generated by taxes and borrowing.

Last Word (6)- The Behavioral Economic of Sticky Prices Reasons for Sticky Output Prices - Consumer Preferences - Business Price Wars - Wages... Wages and salaries are 70% of all costs. Reductions in per-unit labor costs self-defeating

Workers tend to be quite upset if their wages or salaries are cut because they feel that they are being taken advantage of. This resentment is counterproductive for firms because workers will retaliate when their wages or salaries are cut. Pay cuts often increase per-unit production costs.

Arthur sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Camille for $300. Camille uses the cloth to make prom dresses that she sells to Donita for $700. Donita sells the dresses for $1,200 to kids attending the prom. The total contribution to GDP of this series of transactions is a. $1,200. b. $500. c. $2,300. d. $1,100.

a. $1,200. Explanation: The only final goods are the dresses Donita sold.

Personal Taxes$40 Social Security Contributions $15 Taxes on Production and Imports $20 Corporate Income Taxes $40 Transfer Payments $ 22 U.S. Exports $24 Undistributed Corporate Profits $35 Government Purchases $90 Gross Private Domestic Investment $75 U.S. Imports $22 Personal Consumption Expenditures $250 Consumption of Fixed Capital (depreciation) $ 25 Net Foreign Factor Income $ 10 Statistical Discrepancy $ 0 Refer to the accompanying data (all figures in billions of dollars). PI is a. $314. b. $346. c. $408. d. $437.

a. $314. Explanation: PI= NI- (income earned but not received)+ (income received but not earned)

Which of the following economic regions has experienced the least growth in real GDP per capita since 1820? a. Africa b. Asia excluding Japan c. Latin America d. Western Europe

a. Africa Explanation: Great Divergence in Standards of Living Different starting dates for modern economic growth is the main cause of differences in GDP per capita.

(6.7) Which of the following would an economist consider to be investment? a. Boeing builds a new factory b. Oprah buys a $10 million home from a fellow celebrity c. a stockbroker buys 10,000 shares of Starbucks stock d. All of these choices are correct.

a. Boeing builds a new factory Explanation: This is an economic investment.

Which of the following is a true statement? a. Economists who support economic growth say that it is the most practical route to the higher standards of living that the vast majority of people desire. b. Most economists believe that the recent rise in the average rate of productivity growth implies an end to the business cycle. c. Most economists believe that increases in real GDP actually produce decreases in overall economic well-being because of spillover costs. d. Mainstream economists disagree as to whether the rate of productivity growth was higher between 1995 and 2010 or between 1973 and 1995.

a. Economists who support economic growth say that it is the most practical route to the higher standards of living that the vast majority of people desire. Explanation: In Defense of Economic Growth •Growth is the path to greater material abundance and higher standards of living •Improved infrastructure, enhanced care of sick, elderly, disabled •Growth may be the only way to reduce poverty •Lack of growth in industrial countries would severely limit growth in poor nations •Growth has improved working conditions •Increased leisure and opportunities for self-fulfillment •Growth need not result in pollution; richer countries are cleaner. •Human imagination can solve sustainability issues

Which of the following explanations is consistent with the decline in productivity growth that followed the Great Recession? a. High levels of debt incurred prior to the Great Recession have hindered firms' ability to make productivity-enhancing investments. b. The Federal Reserve kept interest rates too high, stifling investments that would increase productivity. c. High levels of inflation following the Great Recession created too much uncertainty for firms, discouraging productivity-enhancing investments. d. Consumer demand following the Great Recession exceeded firms' capacity to satisfy that demand.

a. High levels of debt incurred prior to the Great Recession have hindered firms' ability to make productivity-enhancing investments. Explanation: It is not clear whether productivity slowdown that occurred after the Great Recession is permanent or transitory; were high productivity levels between 1995 and 2010 an anomaly due to information tech revolution? Possible explanations: •High debt levels that accumulated during recession; currently paying down debt rather than making productive investments; entrepreneurs unable to obtain loans •Overcapacity lag from prior to the recession •Information products do not create measurable effect on GDP; Ex. Free Internet Apps create consumer surplus, but it isn't measured •Slowdown in technological progress

Cyclical unemployment results from a. a deficiency of spending on goods and services. b. the decreasing relative importance of goods and the increasing relative importance of services in the U.S. economy. c. the everyday dynamics of a free labor market, with workers voluntarily changing jobs. d. technological change.

a. a deficiency of spending on goods and services.

Net exports are negative when a. a nation's imports exceed its exports. b. the economy's stock of capital goods is declining. c. depreciation exceeds domestic investment. d. a nation's exports exceed its imports.

a. a nation's imports exceed its exports.

In which phase of the business cycle will the economy most likely experience rising real output and falling unemployment rates? a. expansion b. recession c. peak d. trough

a. expansion Explanation: Business Cycle- 4 Phases Peak- temporary maximum of economic output; economy is at or close to full employment, nearing or approaching full capacity; inflationary pressure exists. Recession- period of decline in total output, income, and employment; at least six months; prices many not fall Trough- bottom of reduction in output; may be brief or prolonged Expansion- period in which real GDP, income, and employment increase.

Review Question (6.3): If an economy has sticky prices and demand unexpectedly increases, you would expect the economy's real GDP to: a. increase b. decrease c. remain the same

a. increase

Review Question (6.5): If the demand for a firm's output unexpectedly decreases, you would expect its inventory to: a. increase b. decrease c. remain the same

a. increase

(6.12) When demand shocks lead to recessions, it is mainly due to a. price inflexibility. b. the inability of government policy to affect demand c. unexpected changes in the supply of goods and services d. government regulations that prevent firms from adjusting output in response to the shocks.

a. price inflexibility. Explanation: Economists believe that most short-run fluctuations in the economy are the result of the demand shocks and inflexible prices.

(6.1) Macroeconomics is primarily concerned with a. short-run fluctuations in output and employment and long-run economic growth. b. unemployment and wage rates in labor markets. c. monopoly power of corporations and small business profitability. d. oil prices and housing markets.

a. short-run fluctuations in output and employment and long-run economic growth Explanation: Macroeconomics views the economy as a whole and focuses on the business cycle.

A large underground economy results in an a. understated GDP. b. overstated GDP. c. understated GDP price index. d. overstated GDP price index.

a. understated GDP. Explanation: Shortcomings of GDP •Non-market activities •Leisure and Psychic Income: since the early 1900s, the workweek has declined from 53 to 35 hours; more holidays, vacation, leaves; also does not account for satisfaction derived from the work •Improved product quality •The underground economy: legal and illegal activity •GDP and the environment •Composition and distribution of the output •Noneconomic sources of well-being: reduction in crime, violence, war, etc.

Personal Taxes$23 Net Private Domestic Investment 33 Net Exports 6 National Income 278 U.S. Exports 20 Gross Private Domestic Investment 56 Disposable Income 220 Taxes on Production and Imports 32 Undistributed Corporate Profits 15 Proprietors' Income 45 Net Foreign Factor Income 0 Statistical Discrepancy 0 Refer to the accompanying national income data. All figures are in billions of dollars. The gross domestic product is a. $328. b. $301. c. $382. d. $333.

b. $301. Explanation: Income Approach National Income (278)- Net Foreign Factor Income (0) + Consumption of Fixed Capital (23)+ Statistical Discripency (0) = 301

Personal Taxes$40 Social Security Contributions $15 Taxes on Production and Imports $20 Corporate Income Taxes $40 Transfer Payments $ 22U.S. Exports $24 Undistributed Corporate Profits $35 Government Purchases $90 Gross Private Domestic Investment $75 U.S. Imports $22 Personal Consumption Expenditures $250 Consumption of Fixed Capital (depreciation) $ 25 Net Foreign Factor Income $ 10 Statistical Discrepancy $ 0 Refer to the accompanying data (all figures in billions of dollars). GDP is a. $390. b. $417. c. $422. d. $492.

b. $417. Explanation: Expenditure Approach Personal Consumption Expenditure ($250) + Gross Private Domestic Investment ($75) + Government Purchases ($90) - Net Exports ($24-$22) = $417

Unemployed 7 Total Population 145 Employed 95 Discouraged Workers 3 The table contains information about the hypothetical economy of Scoob. All figures are in millions. The labor force in Scoob is a. 95 million. b. 102 million. c. 105 million. d. 145 million.

b. 102 million. Explanation: Finding labor force Labor force= Employed + Unemployed

Between 1950 and 2018, U.S. real GDP grew at an average annual rate of about a. 2.0 percent. b. 3.1 percent. c. 5.1 percent. d. 8.6 percent.

b. 3.1 percent. Real GDP- Increased more than eight-fold Real GDP per capita- 2.% per year Increased more than four-fold

Which of the following statements is correct? a. Between 1953 and 2018, all growth in U.S. real GDP can be attributed to increases in labor productivity. b. Between 1953 and 2018, increases in labor productivity account for more of the growth in U.S. real GDP than do increases in the quantity of labor. c. Between 1953 and 2018, increases in the quantity of labor account for more of the growth in U.S. real GDP than do increases in labor productivity. d. Between 1953 and 2018, increases in labor productivity and increases in the quantity of labor contributed equally to the growth in U.S. real GDP.

b. Between 1953 and 2018, increases in labor productivity account for more of the growth in U.S. real GDP than do increases in the quantity of labor Explanation: Productivity Growth Average rate of growth: •1.5% per year 1973-1995 •2.8% per year 1995-2010 •0.7% per year 2010-2018 Affects real output, real income, and real wages. Pay higher wages without lowering profit.

(6.11) Which of the following is an example of a demand shock? a. Hurricane Harry knocks out oil drilling platforms in the Gulf of Mexico. b. Consumers become worried about job loss and buy fewer goods and services than expected. c. Floods in the Midwest destroy crops. d. The federal government unexpectedly requires automobile producers to raise fuel efficiency standards.

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

(6.2) Which of the following statements is accurate about most economies? a. Economies experience a positive growth trend over the short run but experience significant variability in the long run. b. Economies experience a positive growth trend over the long run but experience significant variability in the short run. c. Economies experience positive and stable growth over both the long run and short run. d. Economies experience little long-run growth in output but can experience significant growth in the short run.

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

(6.13) Which of the following statements best describes how firms respond to demand shocks under conditions of inflexible prices? a. Firms respond to shorter-term demand shocks by adjusting production levels; more persistent changes in demand result in changes in inventories. b. Firms respond to shorter-term demand shocks by adjusting inventories; more persistent changes in demand result in changes in production levels. c. Firms are reluctant to adjust inventory levels because the costs are higher than changing the quantity of output produced. d. Firms are quick to let go of workers when negative demand shocks occur.

b. 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 statements is most accurate about modern economic growth? a. Economic historians mark modern economic growth as beginning around A.D. 1500. b. Modern economic growth is characterized by sustained and ongoing increases in living standards. c. Modern economic growth has virtually eliminated business cycle fluctuations. d. Modern economic growth has been distributed more or less equally across nations.

b. Modern economic growth is characterized by sustained and ongoing increases in living standards. Explanation: Modern economic growth began with the Industrial Revolution in the last 1700s (1176- Scottish inventor James Watt perfected an efficient steam engine). There was an ongoing increase in living standards and the human life span doubled. Cultural Change- Ordinary people have time for leisure Social Change- public education, reduction of restrictions against women and minorities Political Change- movement towards democracy

Critics of economic growth a. contend that growth and industrialization reduce pollution. b. argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth. c. point out that growth results in greater economic security for workers. d. say that its benefits accrue nearly exclusively to white males.

b. argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth. Explanation: The Antigrowth View •Environmental and resource issues •Little evidence that growth has solved social problems such as poverty, homelessness, and discrimination (believe problem is not output level but distribution) •Does not provide a "better life"; high growth/high stress •Doubt sustainability; finite resources

Personal Taxes$40 Social Security Contributions $15 Taxes on Production and Imports $20 Corporate Income Taxes $40 Transfer Payments $ 22 U.S. Exports $24 Undistributed Corporate Profits $35 Government Purchases $90 Gross Private Domestic Investment $75 U.S. Imports $22 Personal Consumption Expenditures $250 Consumption of Fixed Capital (depreciation) $ 25 Net Foreign Factor Income $ 10 Statistical Discrepancy $ 0 Refer to the accompanying data (all figures in billions of dollars). DI is a. $284. b. $329. c. $274. d. $402.

c. $274. Explanation: DI= PI- Personal Taxes PI= $314- $40

In national income accounting, the personal consumption expenditures category includes purchases of a. both new and used consumer goods. b. automobiles for personal use but not houses. c. consumer durable and nondurable goods but not services. d. consumer nondurable goods and services but not consumer durable goods.

b. automobiles for personal use but not houses. Explanation: Durable goods- goods with expected useful life of at least 3 years; 10% Nondurable goods- goods with expected useful life of less than 3 years; 30% Consumer expenditure for service- approximately 60%; because of the high percentage the US economy is often referred to as a service economy.

Gross Private Domestic Investment $46 Exports of the U.S. $9 Disposable Income $190 Personal Saving $10 Government Purchases $84 Net Foreign Factor Income $10 Consumption of Fixed Capital $52 Dividends $13 Imports of the U.S. $12 Taxes on Production and Imports $22 Personal Taxes $38 Social Security Contributions $23 Statistical Discrepancy $0 Refer to the accompanying data. All figures are in billions of dollars. The economy characterized by the data is a. experiencing inflation because disposable income exceeds personal income. b. experiencing declining production capacity because net investment is negative. c. in a depression because personal income exceeds disposable income. d. experiencing expanding production capacity because net private domestic investment is positive.

b. experiencing declining production capacity because net investment is negative.

If the number of worker-hours in an economy is 100 and its labor productivity is $5 of output per worker-hour, the economy's real GDP a. $20. b. is $500. c. $5,000. d. cannot be calculated.

b. is $500. Explanation: Real GDP= hour of work x average output per hour

(6.17) Nominal gross domestic product a. s a measure of the overall level of prices. b. measures the value of final output produced within a nation in one year, using current prices. c. measures the value of final output produced within a nation in one year, adjusted for changing prices d. only changes when the level of output changes.

b. measures the value of final output produced within a nation in one year, using current prices.

(6.18) Suppose a small economy produces only smart TVs. In year one, 100,000 TVs are produced and sold at a price of $1,200 each. In year two, 100,000 TVs are produced and sold at a price of $1,000 each. As a result, a. nominal GDP stays constant, while real GDP decreases b. nominal GDP decreases, while real GDP stays constant. c. nominal GDP and real GDP both decrease. d. nominal GDP decreases and real GDP decreases even more.

b. nominal GDP decreases, while real GDP stays constant.

National income accountants can avoid multiple counting by a. including transfer payments in their calculations b. only counting final goods. c. counting both intermediate and final goods. d. only counting intermediate goods.

b. only counting final goods. Explanation: National income accounting measures the economy's overall performance. They avoid multiple counting by only counting the value of final goods, not intermediate goods. Final Good- goods purchased for final use, not for resale or for further processing or manufacturing. Intermediate Good- goods purchased for resale or for further processing.

Strong property rights are important for modern economic growth because a. they allow governments to extract the gains from private citizens' investments. b. people are more likely to invest if they don't fear that others can take their returns on investment without compensation. c. they ensure an equitable distribution of income. d. business cycle fluctuations will be smaller and less likely to disrupt investment patterns.

b. people are more likely to invest if they don't fear that others can take their returns on investment without compensation. Explanation: Structures need to: •Increase savings and investment to fund infrastructure needed for modern economy •Promote development of new technologies •Ensure resources flow efficiently to most productive uses Structures include: •Strong property rights •Patents and copyrights •Efficient financial institutions •Literacy and widespread education •Free trade •Competitive market system

The growth of GDP may understate changes in the economy's economic well-being over time if the a. distribution of income becomes increasingly unequal. b. quality of products and services improves. c. environment deteriorates because of pollution d. .amount of leisure decreases.

b. quality of products and services improves.

(6.4) Before the period of modern economic growth, a. only civilizations such as the Roman Empire experienced economic growth b. rates of population growth virtually matched rates of output growth. c. most economies realized high rates of growth in output per person d. output and population growth were stagnant.

b. rates of population growth virtually matched rates of output growth. Explanation: Throughout most of human history, until the Industrial Revolution, living standards were virtually unchanged (output increased with population but per capital output was unchanged). Industrial Revolution ushered in factory production and automation as well as massive increases in research and development.

Which of the following constitute the types of unemployment occurring at the natural rate of unemployment? a. frictional and cyclical unemployment b. structural and frictional unemployment c. cyclical and structural unemployment d. frictional, structural, and cyclical unemployment

b. structural and frictional unemployment

Suppose that inventories were $80 billion in year 1 and $70 billion in year 2. For year 2, national income accountants would a. add $10 billion to other elements of investment in calculating total investment. b. subtract $10 billion from other elements of investment in calculating total investment. c. add $75 billion (= $150/2) to other elements of investment in calculating total investment. d. subtract $75 billion (= $150/2) from other elements of investment in calculating total investment.

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

Gross output (GO) a. and GDP are equivalent measures of the final output of an economy. b. sums together the dollar value of economic activity at every stage of production. c. measures all economic activity leading up to but excluding final output. d. always equals an amount smaller than GD

b. sums together the dollar value of economic activity at every stage of production. Explanation: Gross Output Gross output is the sum of economic activity that takes place at all stages of economic activity: resource extraction, production, distribution, and final output.

Economic growth rates in follower countries a. tend to be lower than in leader countries because labor forces in follower countries are too small. b. tend to exceed those in leader countries because followers can cheaply adopt the new technologies that leaders developed at relatively high costs. c. will never bring real GDP per capita up to the same levels as in leader countries, even if follower growth rates are greater than those in leader countries. d. typically average about 2 percent per year.

b. tend to exceed those in leader countries because followers can cheaply adopt the new technologies that leaders developed at relatively high costs. Explanation: Leader vs Follow Countries Leader countries- invent technology; typically grow 2-3% per year; slow and costly to invent new technology Follower countries- adopt technology; jump to the most current technology rather than go through all stages the leader countries went through allowing faster growth

Which of the following is not an economic investment? a. the purchase of a new drill press by the Ajax Manufacturing Company b. the purchase of 100 shares of AT&T by a retired business executive c. construction of a suburban housing project d. the piling up of inventories on a grocer's shelf

b. the purchase of 100 shares of AT&T by a retired business executive

Personal Taxes$40 Social Security Contributions $15 Taxes on Production and Imports $20 Corporate Income Taxes $40 Transfer Payments $ 22U.S. Exports $24 Undistributed Corporate Profits $35 Government Purchases $90 Gross Private Domestic Investment $75 U.S. Imports $22 Personal Consumption Expenditures $250 Consumption of Fixed Capital (depreciation) $ 25 Net Foreign Factor Income $ 10 Statistical Discrepancy $ 0 Refer to the accompanying data (all figures in billions of dollars). NDP is a. $370. b. $402. c. $392. d. $467.

c. $392. Explanation: NDP NDP= GDP- Depreciation= $417- $25

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 demand and efficiency factors of economic growth, the supply factors of economic growth are a. 2, 5, and 6 only. b. 2, 4, 5, and 6 only. c. 1, 2, 5, and 6 only. d. 1, 3, and 4 only.

c. 1, 2, 5, and 6 only. Explanation: Determinants of Growth- Supply Factors Supply Factors- physical ability of economy to expand - increases in quality and quantity of natural resources - increases in quality and quantity of human resources - increases of supply (or stock) of capital goods - improvements of technology

If a nation's real GDP is growing by 5 percent per year, its real GDP will double in approximately a. 22 years. b. 20 years. c. 14 years. d. 8 years.

c. 14 years. Explanation: Rule of 70 Number of Years to Double= 70/ annual percent rate of growth

Suppose the total monetary value of all final goods and services produced in a particular country in a year is $500 billion and the total monetary value of final goods and services sold is $450 billion. We can conclude that a. GDP that year is $450 billion. b. NDP is $450 billion. c. GDP that year is $500 billion. d. inventories fell by $50 billion.

c. GDP that year is $500 billion. Explanation: GDP accounts for the total market value of all final goods and services produced in a particular year within the borders of a country. This includes all goods and services produced by either citizen-supplied or foreign-supplied resources employed within a country.

(6.5) Savings are generated whenever a. prices are rising b. current spending exceeds current income c. current income exceeds current spending d. GDP exceeds nominal GDP.

c. current income exceeds current spending Explanation: Saving occurs when current consumption is less than current output.

Unemployed 7 Total Population 145 Employed 95 Discouraged Workers 3 The table contains information about the hypothetical economy of Scoob. All figures are in millions. If the natural rate of unemployment in Scoob is 5 percent, then a.structural unemployment is about 3 percent. b. frictional unemployment is about 2 percent. c. cyclical unemployment is about 2 percent. d. hidden unemployment is about 5 percent.

c. cyclical unemployment is about 2 percent. Explanation: Frictional unemployment: Short term •Individuals searching for jobs or waiting to take jobs soon Structural unemployment: Longer term •Occurs due to changes in the structure of the demand for labor; in part due to technology •Geographic: job openings shift from city to suburbs, north to south, etc. •Labor force is slow to respond to demand changes; need to develop new skills; move to new location Cyclical unemployment: "demand-deficient" •Caused by the recession phase of the business cycle

Countries that have experienced modern economic growth have also tended to a. adopt feudalistic institutions. b.restrict women and minorities from holding certain economic and political positions. c. move toward more democratic forms of government. d. have less leisure time for sport and artistic activities.

c. move toward more democratic forms of government.

Increases in the value of a product to each user, including existing users, as the total number of users rises are called a. information cascades. b. learning effects. c. network effects. d. scale economies.

c. network effects.

If real GDP rises and the GDP price index has increased, a. the percentage increase in nominal GDP must have been less than the percentage increase in the price level. b. nominal GDP may have either increased or decreased. c. nominal GDP must have increased. d. nominal GDP must have fallen.

c. nominal GDP must have increased.

Alex works in his own home as a homemaker and full-time caretaker of his children. Officially, he is a. unemployed. b. employed. c. not in the labor force. d. in the labor force.

c. not in the labor force. Explanation: Drawbacks of Unemployment •Loss of skills and loss of self-respect •Plummeting morale •Family disintegration •Poverty and reduced hope •Heightened racial and ethnic tensions •Suicide, homicide, fatal heart attacks, mental illness •Can lead to violent social and political change

Tom Atoe grows fruits and vegetables for home consumption. This activity is a. excluded from GDP in order to avoid double counting. b. excluded from GDP because an intermediate good is involved. c. productive but is excluded from GDP because no market transaction occurs. d. included in GDP because it reflects production.

c. productive but is excluded from GDP because no market transaction occurs. Explanation: Excluded financial transactions: - Public transfer payments - Private transfer payments - Second-hand sales Stocks (and bonds) market transactions are included

(6.9) Banks and other financial institutions a. are the primary investors in equipment, factories, and other capital goods b. lack relevance in the modern economy because they focus primarily on financial assets and generally do not engage in real investment activity c. promote economic growth by helping to direct household savings to businesses that want to invest d. often hinder economic activity by creating barriers between household savers and firms wanting to invest in capital goods.

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

A nation's infrastructure refers to a. its ability to realize economies of scale. b. its stock of technological knowledge. c. public capital goods such as highways and sanitation systems. d. the productivity of its labor force.

c. public capital goods such as highways and sanitation systems.

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 a. seasonal unemployment. b. cyclical unemployment. c. structural unemployment. d. frictional unemployment.

c. structural unemployment.

The natural rate of unemployment is a. higher than the full-employment rate of unemployment. b. lower than the full-employment rate of unemployment. c. that rate of unemployment occurring when the economy is at its potential output. d. found by dividing total unemployment by the size of the labor force.

c. that rate of unemployment occurring when the economy is at its potential output. Explanation: Natural Rate of Unemployment (NRU) •Full employment level of unemployment; no cyclical unemployment •Economy is considered to be producing at full potential output •Number of job seekers = Number of job vacancies •Currently between 4 and 5%?? •Can vary over time •Demographic changes •Changing job search methods •Public policy changes •Actual unemployment can be above or fall below the NRU

GDP tends to a. overstate economic welfare because it does not include certain nonmarket activities such as the productive work of housewives. b. understate economic welfare because it includes expenditures undertaken to offset or correct pollution. c. understate economic welfare because it does not take into account increases in leisure. d. overstate economic welfare because it does not reflect improvements in product quality.

c. understate economic welfare because it does not take into account increases in leisure.

Personal Taxes$23 Net Private Domestic Investment 33 Net Exports 6 National Income 278 U.S. Exports 20 Gross Private Domestic Investment 56 Disposable Income 220 Taxes on Production and Imports 32 Undistributed Corporate Profits 15 Proprietors' Income 45 Net Foreign Factor Income 0 Statistical Discrepancy 0 Refer to the accompanying national income data. All figures are in billions of dollars. Personal income is a. $229. b. $253. c. $274. d. $243.

d. $243. Explanation: PI= NI- (income earned but not received)+ (income received but not earned) PI= 278 - 45+0 = 243

Personal Taxes$40 Social Security Contributions $15 Taxes on Production and Imports $20 Corporate Income Taxes $40 Transfer Payments $ 22U.S. Exports $24 Undistributed Corporate Profits $35 Government Purchases $90 Gross Private Domestic Investment $75 U.S. Imports $22 Personal Consumption Expenditures $250 Consumption of Fixed Capital (depreciation) $ 25 Net Foreign Factor Income $ 10 Statistical Discrepancy $ 0 Refer to the accompanying data (all figures in billions of dollars). NI is a. $362. b. $382. c. $447. d. $402.

d. $402. Explanation: NI NI=

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 efficiency factor of economic growth, the demand factor(s) of economic growth is (are) a. 1 only. b. 4 only. c. 1 and 3 only. d. 3 only.

d. 3 only. Explanation: Determinants of Growth- Demand Factor Demand Factor- households, businesses, and government must purchase the economy's expanding output.

Economy A: gross investment equals depreciation Economy B: depreciation exceeds gross investment Economy C: gross investment exceeds depreciation Other things equal, the information suggests that the production capacity in the economy a. B is growing more rapidly than that in either economy A or C. b. A is growing more rapidly than that in either economy B or C. c. A is growing less rapidly than that in economy B. d. C is growing more rapidly than that in economy B.

d. C is growing more rapidly than that in economy B.

(6.15) Which of the following best explains why prices tend to be inflexible even when demand changes? a. Government regulations limit the number of times a firm can change prices in a year. b. In most industries the profit-maximizing price does not change even when demand changes. c. Production costs do not tend to change when a firm varies its level of output. d. Firms may be reluctant to change prices for fear of setting off a price war or losing customers to rivals.

d. Firms may be reluctant to change prices for fear of setting off a price war or losing customers to rivals. Explanation: Many prices are sticky in the short run because consumers prefer stable, predictable prices and firms want to avoid price wars. All prices are flexible in the long run. Firms adjust to the unexpected, but permanent changes in demand.

Refer to the diagram. Which of the following statements is correct? a. The price index is greater than 100 for every year shown on the graph. b. Nominal GDP must be deflated in each year prior to 2000 to determine real GDP. c. Real GDP has grown in this economy, but nominal GDP has not. d. Nominal GDP must be deflated in each year after 2000 to determine real GDP.

d. Nominal GDP must be deflated in each year after 2000 to determine real GDP. Explanation: Nominal vs Real GDP Nominal GDP- GDP valued in terms of prices that prevailed when the output was produced; GDP unadjusted for changes in prices (inflation or deflation) Real GDP- GDP valued in terms of a prior period's dollars; GDP adjusted for price changes (inflation or deflation); Real GDP gives a measure of the actual change in output.

(6.3) If the prices of all goods and services rose, but the quantity produced remained unchanged, what would happen to nominal and real GDP? a. Nominal and real GDP would both rise. b. Nominal and real GDP would both be unchanged. c. Real GDP would rise, but nominal GDP would be unchanged. d. Nominal GDP would rise, but real GDP would be unchanged.

d. Nominal GDP would rise, but real GDP would be unchanged. Explanation: Nominal vs Real GDP GDP is the value of all final goods and services produced within the borders of a country during a specific period of time, typically one year. - Real GDP- corrects for price change - 2020- down 3.5% - Nominal GDP- uses current prices - 2020- down 2.3%

Which of the following statements is correct? a. The U.S. population has increased more rapidly than real GDP in recent decades. b. Improved education and training of labor is the most important source of U.S. productivity growth. c. The average American factory worker has about 16 years of formal education. d. The amount of real capital used per worker has increased historically in the United States.

d. The amount of real capital used per worker has increased historically in the United States.

Which of the following is not seen by economists as an underlying cause of business cycle fluctuations? a. unexpected financial bubbles that eventually burst b. shocks to the money supply by the nation's central bank c. supply shocks caused by major innovations d. all of these are identified as causes of business cycle changes.

d. all of these are identified as causes of business cycle changes. Explanation: Causes of shocks: •Irregular innovation: significant new products or production methods such as railroads, microchip, internet; create investment and consumption spending, resulting in expansion; irregular and unexpected •Productivity changes: unexpected increases cause expansion; unexpected declines cause recession •Monetary factors: when the money supply unexpectedly increases, expansion occurs; unexpected declines cause recessions •Financial Instability: Bubbles and Bursts •Great Recession: Real estate/mortgage bubble •Political events: treaties, wars, terrorist attacks

The industries or sectors of the economy in which business cycle fluctuations tend to affect output most (except in 2020) are a. military goods and capital goods. b. services and nondurable consumer goods. c. clothing and education. d. capital goods and durable consumer goods.

d. capital goods and durable consumer goods. Explanation: Cyclical Impact Durable goods are affected the most ("cyclical industries"). These are capital goods and consumer durable goods. Nondurable consumer goods are affected far less. These are services, food, and clothing.

Refer to the diagram. The base year used in determining the price indices for this economy a. cannot be determined from the information given. b. is some year before 2000. c. is more recent than 2000. d. is 2000.

d. is 2000. Explanation: It is where Nominal and real GDP intersect.

Other things equal, if a full-employment economy reallocated a substantial quantity of its resources to capital goods, we would expect a. present consumption to rise. b. future consumption to fall. c. a lower rate of growth of real GDP. d. labor productivity to rise.

d. labor productivity to rise.

(6.8) If an economy wants to increase its current level of investment, it must a. sacrifice future consumption b. print more money c. offer more stocks and bonds to financial investors d. sacrifice current consumption

d. sacrifice current consumption

The fact that nominal GDP has risen faster than real GDP a. suggests that the base year of the GDP price index has been shifted. b. tells us nothing about what has happened to the price level. c. suggests that the general price level has fallen. d. suggests that the general price level has risen.

d. suggests that the general price level has risen.

The largest contributor to increases in the productivity of American labor is a. the reallocation of labor from agriculture to manufacturing. b. improvements in labor quality. c. increases in the quantity of capital. d. technological advance.

d. technological advance. Explanation: Factors Affecting Productivity Growth •Technological advance (40%) •Quantity of capital (30%): this is closely related to technological advances; both private and public (infrastructure) •Education and training (15%); Figure 8.4 and Global Perspective •Economies of scale and resource allocation (15%)

The unemployment rate of a. women greatly exceeds that of men. b. whites is roughly equal to that of African Americans. c. managerial and professional workers exceeds that of construction and extraction workers. d. teenagers is much higher than that of adults.

d. teenagers is much higher than that of adults. Explanation: Unemployment is not spread evenly across the population; hardest hit by unemployment: •Occupation: Workers in lower-skilled occupations •Age: Younger workers •Race and ethnicity •Gender: Unemployment rates for men and women are usually similar, but during the Great Recession the unemployment rate for men significantly exceeded that for women •Education •Duration: during recessions, those unemployed for more than 15 weeks increases

If personal income exceeds national income in a particular year, we can conclude that a. transfer payments exceeded the sum of Social Security contributions, corporate income taxes, and taxes on production and imports. b. the sum of Social Security contributions, corporate income taxes, and undistributed corporate profits exceeded transfer payments. c.consumption of fixed capital and taxes on production and imports exceeded personal taxes. d. transfer payments exceeded the sum of Social Security contributions, corporate income taxes, and undistributed corporate profits.

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