EC202 Quiz Questions

Which of the following agencies calculates the CPI? A. Bureau of Labor Statistics B. Congressional Budget Office C. Federal Reserve D. Bureau of National Price Standards and Records

A. Bureau of Labor Statistics

Because every transaction has a buyer and a seller, A. every transaction contributes equally to an economy's income and to its expenditure. B. GDP is more closely associated with an economy's income than it is with an economy's expenditure. C. the number of firms must be equal to the number of households in a simple circular-flow diagram. D. firms' profits are necessarily zero in a simple circularflow diagram.

A. every transaction contributes equally to an economy's income and to its expenditure.

National defense is a classic example of a public good because A. it is difficult to exclude people from receiving the benefits from national defense once it is provided. B. everyone agrees that some level of national defense is important, but only the government knows the optimal amount. C. there are no private firms willing to supply defense goods such as tanks and weapons. D. there is no market for private security services.

A. it is difficult to exclude people from receiving the benefits from national defense once it is provided.

Which of the following quantities decrease in response to a tax on a good? A. the equilibrium quantity in the market for the good, producer surplus, and the well-being of buyers of the good B. the equilibrium quantity in the market for the good, the effective price of the good paid by buyers, and consumer surplus C. the effective price received by sellers of the good, the wedge between the effective price paid by buyers and the effective price received by sellers, and consumer surplus D. None of the above is necessarily correct unless we know whether the tax is levied on buyers or on sellers.

A. the equilibrium quantity in the market for the good, producer surplus, and the well-being of buyers of the good

Suppose a country called Eutopia only produces two goods: pencils and cups. In 2014, it produces 10 pencils and 4 cups, in 2015 it produces 14 pencils and 6 cups. Prices in 2014 for pencils and cups are $2 and $2, and are $3 and $4 in 2015. Also, the consumer basket is chosen by the official in Eutopia as 2 pencils and 3 cups, while the base year is chosen to be 2014. What is the CPI for Eutopia in 2015? A. 10 B. 1.8 C. 18 D. 1.65

B. 1.8 Following the steps we discussed in class to get CPI. As can be seen the consumer basket is given to you, as well as prices for different years. Then, The CPI basket expenditure for base year 2014 is $2*2+$2*3 = $10 The CPI basket expenditure for 2015 is $3*2 + $4*3 = $ $18 Therefore, CPI for 2015 is $18/$10 = 1.8 (or 180 if multiplied by 100 but it is not provided in the question) If you get 1.65... it is probably the GDP deflator_2015 = Nominal GDP2015/Real GDP2015 = (14*$3+6*$4)/ (14*$2+6*$2) = $66/$40 = 1.65. (or 165 if multiplied by 100 using the definition from textbook). I intentionally put the information in the first paragraph to distract you... in fact if you see you need to calculate CPI, the only things you care are the consumer basket and prices, and you can definitely ignore the output information unless you are asked to calculate GDP deflator or nominal/real GDP.

Suppose that an economy produces 20,000 units of good A which sells at $3 a unit and 40,000 units of good B which sells at $1 per unit. Production of good A contributes A. 1/3 times as much to GDP as the production of good B. B. 3/2 times as much to GDP as the production of good B. C. 3 times as much to GDP as the production of good B. D. 2/3 times as much to GDP as production of good B.

B. 3/2 times as much to GDP as the production of good B.

The demand curve for beer is downward sloping. When the price of beer is $3, the quantity demanded is 150. If the price rises to $5, what happens to consumer surplus in this market? A. It falls by more than $300. B. It falls by less than $300 C. It rises by more than $300. D. It rises by less than $300.

B. It falls by less than $300

When a tax is placed on a product, the price paid by buyers A. rises, and the price received by sellers rises. B. rises, and the price received by sellers falls. C. falls, and the price received by sellers rises.

B. rises, and the price received by sellers falls.

What basket of goods and services is used to construct the CPI? A. a random sample of all goods and services produced in the economy B. the goods and services that are typically bought by consumers as determined by government surveys C. only food, clothing, transportation, entertainment, and education D. the least expensive and the most expensive goods and services in each major category of consumer expenditures

B. the goods and services that are typically bought by consumers as determined by government surveys

For an economy as a whole, A. investment must equal the value of stocks and bonds purchased. B. the market value of production must equal expenditure. C. wages must equal income. D. consumption must equal saving.

B. the market value of production must equal expenditure.

If in an economy, the inflation rate is 8 percent and the nominal interest rate is 5.5 percent, then the real interest rate is A. 2.5 percent. B. 0.45 percent. C. -2.5 percent. D. 13.5 percent.

C. -2.5 percent. r + % ∆p = i -recall: real interest rate can be negative i inflation rate is higher than nominal gdp

According to our Wednesday class, the real GDP per capita can be decomposed to A. APL x LF B. GDP/LF C. APL x LFPR D. GDP/ APL (Hint: APL is average labor productivity, LF is labor force, and LFPR is labor force participation rate.)

C. APL x LFPR

Tax burden will always be shared evenly between consumers and producers A. True B. False, it depends on the size of the government tax C. False, it depends on the elasticity of the demand and supply curves D. False, it depends on the difference between consumer surplus and producer surplus.

C. False, it depends on the elasticity of the demand and supply curves

Which of the following is an example of a positive externality? A. Bob mows Hillary's lawn and is paid $100 for performing the service. B. While mowing the lawn, Bob's lawnmower spews out smoke that Hillary's neighbor Kristen has to breathe. C. Hillary's newly cut lawn makes her neighborhood more attractive. D. Hillary's neighbors pay her if she promises to get her lawn cut on a regular basis.

C. Hillary's newly cut lawn makes her neighborhood more attractive.

Which of the following is true of markets characterized by positive externalities? A. Social value exceeds private value, and market quantity exceeds the socially optimal quantity. B. Social value is less than private value, and market quantity exceeds the socially optimal quantity. C. Social value exceeds private value, and market quantity is less than the socially optimal quantity. D. Social value seldom exceeds private value; therefore, social quantity is less than private quantity.

C. Social value exceeds private value, and market quantity is less than the socially optimal quantity. With positive externality, the goods will be under-supplied, i.e. the market quantity is less than the socially optimal quantity. That is why government subsidizes the demand or supply side in the market

In a market economy, government intervention A. will always distort market outcomes. B. reduces efficiency in the presence of externalities. C. may improve market outcomes in the presence of externalities. D. is necessary to control individual greed.

C. may improve market outcomes in the presence of externalities.

The CPI is more commonly used as a gauge of inflation than the GDP deflator is because A. the CPI is easier to measure. B. the CPI is calculated more often than the GDP deflator is. C. the CPI better reflects the goods and services bought by consumers. D. the GDP deflator cannot be used to gauge inflation.

C. the CPI better reflects the goods and services bought by consumers.

If a Pennsylvania gun manufacturer raises the price of rifles (not a consumer good) it sells to the U.S. Army, its price hikes will increase A. both the CPI and the GDP deflator B. neither the CPI nor the GDP deflator C. the GDP deflator but not the CPI D. the CPI but not the GDP deflator

C. the GDP deflator but not the CPI Explain: US army expenditure (national defense) is part of government spending, which is included in GDP calculation as well as GDP deflator. However it is not in the consumer basket (as indicated by the question) so it will not change CPI. It is a question from our textbook.

GDP is defined as the A. value of all goods and services produced within a country in a given period of time. B. value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time. C. value of all final goods and services produced within a country in a given period of time. D. value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.

C. value of all final goods and services produced within a country in a given period of time.

If the consumer price index is 200 in year 1980 and 300 today, then $ 600 in 1980 has the same purchasing power as ___ today. A.500 B.400 C.900 D.700

C.900 Therefore V_today = (V_1980 * CPI_today)/ CPI_1980 =$600*300/200 =$900

An American buys a pair of shoes manufactured in Italy. How do the U.S. national income accounts treat the transaction? A. Net exports and GDP both rise. B. Net exports and GDP both fall. C. Net exports are unchanged, while GDP rises. D. Net exports fall, while GDP is unchanged.

D. Net exports fall, while GDP is unchanged. Recall Y = C + I + G + NX = C + I + G + (X-M). Here import increase, M goes up, and this makes NX (net export) goes down. Also consumption C increase. These two change have exactly the same amount with opposite direction, therefore D is correct.

1. Which of the following is not correct? A. The consumer price index gives economists a way of turning dollar figures into meaningful measures of purchasing power. B. The consumer price index is used to monitor changes in the cost of living over time. C. The consumer price index is used by economists to measure the inflation rate. D. The consumer price index is used to measure the quantity of goods and services that the economy is producing.

D. The consumer price index is used to measure the quantity of goods and services that the economy is producing. - this is measured by GDP

Which of the following does NOT add to U.S. GDP? A. Air France buys a plane from Boeing, the U.S. aircraft manufacturer. B. General Motors builds a new auto factory in North Carolina. C. The city of New York pays a salary to a policeman. D. The federal government sends a Social Security check to your grandmother.

D. The federal government sends a Social Security check to your grandmother. Explain: the last one is an example for government transfer payment, as I mentioned in class. A the air plane is manufactured in US (seems Boeing do not have oversea factories) so it is a part of US net export (actually export).

Which of the following statements is correct? A. Real GDP cannot be equal to nominal GDP because the former controls the price level change (inflation). B. GDP per capita is as good as GDP when measuring the standard of living in an economy since both measure the wealth created by this country. C. To increase standard of living in a country, the best way is to encourage people to work more by subsidizing. D. There could be some difference between income and expenditure ways calculating GDP due to statistical discrepancy.

D. There could be some difference between income and expenditure ways calculating GDP due to statistical discrepancy. So as we talked about in class, increase labor productivity is important to increase real GDP per capita, and investing on research or education is needed due to this, rather than persuade people to work more.

Suppose Raymond and Victoria attend a charity benefit and participate in a silent auction. Each has in mind a maximum amount that he or she will bid for an oil painting by a locally famous artist. This maximum is called A. Producer surplus. B. Deadweight loss. C. Consumer surplus D. Willingness to pay

D. Willingness to pay

Most goods and services produced at home A. and most goods and services produced illegally are included in GDP. B. are included in GDP while most goods and services produced illegally are excluded from GDP. C. are excluded from GDP while most goods and services produced illegally are included in GDP D. and most goods and services produced illegally are excluded from GDP.

D. and most goods and services produced illegally are excluded from GDP.

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) Be very careful about which is which on the numerator and denominator. ***current is denominator

Because consumers can sometimes substitute cheaper goods for those that have risen in price, A. the GDP deflator understates inflation. B. the CPI understates inflation. C. the GDP deflator overstates inflation. D. the CPI overstates inflation

D. the CPI overstates inflation *CPI not gdp

Which of the following headlines is more closely related to what microeconomists study than to what macroeconomists study? A. Unemployment rate falls from 7.5 percent to 7.3 percent. B. Real GDP falls by 0.4 percent in the third quarter. C. Inflation was 2.4 percent last year. D. the price of gasoline rises due to rising oil prices.

D. the price of gasoline rises due to rising oil prices.

As the size of a tax increases, the tax revenue will first decrease, then increase (True or False)

False

The market for gluten-free bread is characterized by an inelastic demand and an elastic supply. What would happen to the deadweight loss of a tax, if the demand curve became more elastic ?

The DWL would increase recall: more elastic = greater deadweight loss more elastic = small tax burden

Producer surplus increases when the price increases. (True or False)

True

Movie tickets and DVDs are substitutes. If the price of DVDs decreases, what happens in the market for movie tickets? a. The demand curve shifts to the left. b. The supply curve shifts to the left. c. The supply curve shifts to the right. d. The demand curve shifts to the right.

a. The demand curve shifts to the left

If the government removes a binding price ceiling from a market, then the price paid by buyers will a. increase, and the quantity sold in the market will increase. b. increase, and the quantity sold in the market will decrease. c. decrease, and the quantity sold in the market will increase. d. decrease, and the quantity sold in the market will decrease

a. increase, and the quantity sold in the market will increase.

The demand for a good or service is determined by a. those who buy the good or service. b. the government. c. those who sell the good or service. d. both those who buy and those who sell the good or service.

a. those who buy the good or service

The discovery of a large new reserve of crude oil will shift the __ curve for gasoline, leading to a ____ equilibrium price. a. supply, higher b. supply, lower c. demand, higher d. demand, lower

b. supply, lower

The supply curve and demand curve expressions in a good market is given as: 12 = Qs and P = 10 - Qd. What will the quantity sold/bought in this market? (Hint: draw a graph if you can) A. 12 B. 10 C. 0 D. -2

c. 0 This is a little tricky. You might end up wondering the result you get is Q*=12 and P* = -2 using the techniques we talked about in class. BUT always remember values for P and Q can NEVER be negative in our discussion (they can only be in the first quadrant and its boundary), so this is actually NOT a reasonable market equilibrium solution.

In a market economy, supply and demand are important because they a. play a critical role in the allocation of the economy's scarce resources. b. determine how much of each good gets produced. c. can be used to predict the impact on the economy of various events and policies. d. All of the above are correct.

d. All of the above

In a competitive market, the price of a product a. is determined by buyers, and the quantity of the product produced is determined by sellers. b. is determined by sellers, and the quantity of the product produced is determined by buyers. c. and the quantity of the product produced are both determined by sellers. d. None of the above is correct.

d. None of the Above -price and quantity are determined by both buyers and sellers as they interact in the marketplace

Which of the following might cause the demand curve for an inferior good to shift to the right? a. an decrease in the price of a substitute b. an increase in the price of a complement c. an increase in income d. None of the above is correct.

d. None of the above This is a tricky question. The substitute/complement relationship still holds for inferior good, and notice the direction of demand curve shifting when income changes. Therefore, none of A, B or C is correct.

A price ceiling is a. often imposed on markets in which "cutthroat competition" would prevail without a price ceiling. b. a legal minimum on the price at which a good can be sold. c. often imposed when sellers of a good are successful in their attempts to convince the government that the market outcome is unfair without a price ceiling. d. None of the above is correct.

d. None of the above Government want to impose price ceiling probably because the price is too high. A market price higher than competitive equilibrium price is caused by possibly strong market force on the supply side (lack of competition, think about Microsoft), but rather what option A has said. Option B is the definition of price floor. Also, notice that seller do not want a binding price ceiling which will give them a lower price compared to scenario without a price ceiling, hence C is wrong.

The privately-owned school system in Smalltown has a virtually unlimited capacity. It accepts all applicants and operates on both tuition and private donations. Although every resident places value on having an educated community, the school's revenues have suffered lately due to a large decline in private donations from the elderly population. Since the benefit that each citizen receives from having an educated community is a public good, which of the following would NOT be correct? a. The free-rider problem causes the private market to undersupply education to the community. b. The government can potentially help the market reach a socially optimal level of education. c. A tax increase to pay for education could potentially make the community better off. d. The private market is the best way to supply education.

d. The private market is the best way to supply education.

1. To fully understand how taxes affect economic well-being, we must A. assume that economic well-being is not affected if all tax revenue is spent on goods and services for the people who are being taxed. B. compare the taxes raised in the United States with those raised in other countries, especially France. C. take into account the fact that almost all taxes reduce the welfare of buyers, increase the welfare of sellers, and raise revenue for the government. D. compare the reduced welfare of buyers and sellers to the amount of revenue the government raises.

d. compare the reduced welfare of buyer and sellers to the amount o revenue the government raises

When a tax is levied on a good, the buyers and sellers of the good share the burden, A. provided the tax is levied on the sellers. B. provided the tax is levied on the buyers. C. provided a portion of the tax is levied on the buyers, with the remaining portion levied on the sellers. D. regardless of how the tax is levied.

d. regardless of how the tax is levied

The forces that make market economies work are a. work and leisure. b. politics and religion. c. taxes and government spending. d. supply and demand.

d. supply and demand